Preparing to Fall Off a Cliff – The Problem of One-Time Funds

Last Friday Joseph Conaty, acting Assistant Sec. of Elementary and Secondary Education discussed the unique opportunity that this one-time infusion of stimulus funds provides in an event hosted by Teachscape and the Carnegie foundation (audio discussion and slides here starting Thursday). Much is still unknown about how some of the funding will be distributed and what its uses are especially the $5 billion available for incentive funding. Of course, many school districts will just be using this infusion of federal funds to backfill severe budget cuts that they would otherwise have to make because of falling local property tax revenues or declining state budgets. These districts will be trying to use the new funds to keep in place their current program while trying not to violate the supplement not supplant and maintenance of effort requirements of the federal funds. (See here for discussion). But even the districts that are trying to backfill for potential cuts may not be acting in a fiscally prudent way. One of the first axioms of budgeting is not to use one time funds for ongoing purposes. This is how many states got into fiscal difficulty at the start of this decade when they used dot-com bubble funding to create on-going programs or cut taxes. When the bubble burst, then states were stuck. At least one state – California – has yet to work its way out of the bad decisions it made with one-time funds. Effectively it wasn’t politically viable to increase the taxes back the level they were before the windfall or eliminate the new programs that were created.

During Dr. Conaty’s briefing, he responded to a question about the one time nature of these funds by describing the stimulus funds as a “cliff effect” or a large one-time (or limited term) infusion of funds that will end. So what should districts do with these funds when they are facing a cliff? (It should be noted that for the political reasons discussed below, the steep cliff that schools are currently facing - basically cutting federal funding in half - will likely be more of a gentle bluff because of the politics discussed below.)
Dr. Conaty threw out one concrete answer – districts could invest these funds on school facility repairs, a somewhat unsatisfying answer for many reformers because new shiny buildings may not change the outcomes for kids much (An aside, my wife, a resource economist, hit me with the same suggestion when I described the issue to her). Of course schools don’t tend to like to use operation funds for capital outlay because they can usually go to their voters and get more funding for facility needs, but often have a difficult time when they ask voters for more operational funds.

This raises the question, of what states and school districts should do when faced with a cliff? Should they jump by investing much of their new one time funds on on-going programs? There are two ways to approach this issue: What is best for education collectively and what is best for a specific district. Collectively, the education community may want to see most of this new funding committed to on-going staffing costs. Unions would certainly support this type of use of the funds because it would mean an increase in union membership, or salaries and benefits, or both. In addition, use of the funding for ongoing program purposes creates a better negotiating position when the stimulus funding runs out, and Congress is faced with having to ask education to go back to their historic budgeting levels (i.e. minus these one-time funds). If much of the stimulus funds are committed to ongoing investments, the education community will be able to argue that cutting funds back will diminish the educational gains that have been made and would lay off large numbers of teachers in districts with the kids that need it most. In addition the impact of teacher lay offs would be detrimental to the economic recovery (that we all hope is happening in two years). So, if the education community can collectively act somewhat irresponsibly, by spending this one-time funding on ongoing purposes, they can make it even more difficult for Congress to reduce their historic investment. First, this would fly in the face of the “New Era of Responsibly.” (here). Second, this would often not be in the best interest of the district as discussed below.


The best course of action for a specific district is likely different than the collective approach, and the answer really depends upon the condition of the districts budget going into this. If the district just fell off of a cliff because of a dramatic fall in its state and local funds, then using this federal parachute to avoid cuts makes sense (although making some cuts and saving some of this one-time money would likely be a better approach).
If the district is in a somewhat better position, then the district will be faced with a choice between many of these sexy and perhaps most promising new school reform ideas (early childhood education, rewarding effective teachers, creating promise neighborhoods … ) and considering the boring conservative budget axioms like never invest one-time funds on ongoing programs. So while it is great to talk about all of the reforms that could be funded using these dollars, taking the school reform leap is a risky one. What will those more fiscally conservative districts do with the funds?

1. Create large reserves – Not very sexy, but this is likely the best use of these funds. Through creating a reserve, districts could spread the benefits of the federal investment over a longer time period than 2 years. Now technically, the stimulus funds need to be spent in a timely fashion or districts will lose the funds. But, there are carry over provisions for the base federal budget funds. And most states allow districts to carry over a certain share of their state and local funds. So, districts should spend stimulus funds first, and then horde some of their base funds (again trying not to get in trouble with the accountants and auditors). Even districts that are using all of their federal funds to backfill cuts, might be well advised to make some cuts, and put a little aside for 2011-12 when they might fall off a cliff.

2. Make investments which will reduce future operating costs. Invest in district upgrades and data systems that will make the central office more effective. Replace old boilers, deferred maintenance other repairs that will lead to greater energy efficiencies, and/or reduce future cost obligations.
3. Improve the quality of local assessments, instructional materials, and computer technology.
4. Contract out for temporary services. This could include targeted professional development for teachers and principals, hiring school turn around consultants …

Taking these actions would best position a school district to weather the difficult fiscal times that are likely to be a part of education finance for the foreseeable future. But as discussed above, if all districts took these steps that are fiscally prudent for the district, it would be easier for Congress to reduce the funding at the end of the stimulus funding. So the interest of the collective and of the individual district may be in conflict.

Of course we can likely count on their being some less fiscally prudent districts that will:

1. Hire new staff or increase salaries.
2. Create new programs within the district.
3. Provide reward incentives. While over the long run teacher compensation should be reformed to have a portion of a teachers salary depend upon some measure of performance, using one-time funds for teacher and principal rewards is not likely to have the incentive effect that one might like. For example if funding for teacher rewards was going to be provided in 2009-10, it would likely be based at least partially on 2008-09 assessment results. But, guess what you can’t create an incentive through rewarding teachers after the fact. Ask California how well this worked for the hundreds of millions that they provided in rewards after the fact.

Unfortunately, the types of reforms that have the most promise are more likely to take ongoing resources instead of one-time. So some districts may be temped to not be conservative, and use the funds to maintain existing programs, create new ones, hire new staff and generally improve the quality of their educational services while at the same time stimulating the economy by creating jobs. And what happens two years from now when they fall of the cliff? Maybe the feds will provide another parachute (even though it is not in the current budget planning). If not base jumping off cliffs may not be that much fun. “Base jumping is a highly dangerous sport that can easily injure and kill participants” (basejumper.com).

Given that the funding that districts control (Title I, special education and stabilization funds) is not likely to go to investments that will drive the type of reforms that education needs, it becomes apparent why the $5 billion in incentive funding is so important to the reform community. We will have to wait any see the rules on these funds.

In response to this post a friend sent me this link on basejumping. Can stimulus funds be used for this? Maybe some of the incentive and innovation funds?