The rapid spread of the coronavirus and necessary public health response will hit the state budget hard. This damage has the potential to punch a big hole in school district budgets, too.
The dramatic fiscal downturn has already been dubbed the Coronavirus Recession, and it has public education advocates across the state worried.
“Between COVID-19 effectively locking up the Texas and national economies and the dramatic drop in oil prices, what I’m hearing from school board members are worries that the state just passed a big school funding bill, and the state might not be able to keep the promises of that bill even for this coming school year,” said TASB’s Governmental Relations Division Director Dax Gonzalez.
It’s still too early to quantify the exact impact this recession will have on Texas public schools, but the gathering storm clouds bare an eerie resemblance to the ones we saw on the horizon before the Texas Legislature cut $5.4 billion from education funding in 2011.
It’s important to understand what happened to public education funding last decade, the pressures legislators will be facing, and how legislative decisions can impact local school districts. School board members, superintendents, and public education advocates will need to speak up or see history repeat itself.
Here’s what school leaders and public education advocates need to know now:
Why public education experts are worried about the Coronavirus Recession
For school funding, the Coronavirus Recession looks a lot like the Great Recession. If the past is prologue, the parallels to our current situation start in 2006. The Texas Legislature touted cuts to school property taxes and set a new tax rate limit of $1.17 that summer.
About a year later, the economy went into freefall. Several US financial institutions collapsed, and the federal government stepped in to dole out more than $1.4 trillion in stimulus and bailout funds. The Great Recession was the most severe economic downturn in the US since the 1930s.
Texas received some stimulus funds from the American Recovery and Reinvestment Act that helped prop up the national economy. Instead of investing those funds in non-recurring expenses to boost the Texas economy, legislators chose to shore up gaps in state funding created by the recession. The decision came with an expensive price tag.
By 2011, the stimulus funds had dried up. The Legislature faced a fiscal cliff. They didn’t have the revenue to meet the state’s needs. Budgets were slashed across the board—most notably, $5.4 billion was axed from public education.
“Fast forward to 2020 and a lot of the same underlying dynamics are at play,” said Gonzalez.
Last summer, the Texas Legislature touted property tax cuts and compressed school property tax rates to $1.08. In a new twist, the state also imposed a local property tax revenue cap of 2.5 percent for school districts. Then the Great Lockdown happened. The economy has again gone into free fall.
The federal government has again stepped in, approving a $2 trillion stimulus package that will start making its way down to the states for disbursement.
Texas Comptroller Glen Hegar had previously projected a conservative $2.9 billion surplus, a projection some expected the state to beat. Hegar told The Texas Tribune during a virtual event that the state budget could be short several billion dollars next session.
“I know that we’re unfortunately in a recession. I just don’t know how deep it’s going to be,” Hegar said during the interview.
State leaders can likely address short term needs to finish out the second year of the biennial budget without a special session. When the Legislature meets in January 2021, they’ll have the opportunity to steer the state out of a post-stimulus slump or repeat recent history by using stimulus funds to pay for recurring expenses.
How state and local education funding will be affected by the Coronavirus Recession
Public education depends on state funding. The current funding system makes public education more expensive for the state in an economic downturn.
Local school district taxes generally raise about 55 to 60 percent of the cost of public education. Then the state steps in to fill in the rest of the funding—about 40 to 45 percent. As property values fall in many areas, as they likely will, districts will pull in less revenue. With that, the state’s funding obligation grows.
“The reality is money is going to be tight at the local level, and at the state level, too. Education is a big-ticket item for the state, and the state’s revenue streams are all going to be hit by this,” said Gonzalez.
Pre-K-12 public education funding accounts for almost a quarter of the state’s biennial budget. The Texas Legislature only has a limited set of revenue streams available to fund public education, including:
- Sales taxes
- Motor vehicle sales taxes
- Oil and natural gas production taxes
- Franchise taxes
- Motor fuel taxes.
- Permanent School Fund disbursements
- Texas Lottery allocations
- Revenue from local property taxes recaptured from school districts
Sales taxes account for 57 percent of all tax collections in Texas. With huge swaths of the economy effectively closed, unemployment rising, and travel restricted, the state’s tax revenue streams are slowing to a trickle.
The oil and gas industry still plays a major role in the Texas economy, and the pandemic has hit this sector hard. Oil futures took a brief and unprecedented plunge into negative territory in April. In addition to the impact of the virus, production decisions by Russia and Saudi Arabia have driven the price of oil down to historic lows.
The state’s Economic Stabilization Fund (ESF), also known as the Rainy Day Fund, relies on a robust oil and gas industry to fill its coffers.
In addition to the impact on state tax revenue, many Texas school districts in natural resource-producing communities will be disproportionately affected by dropping property values.
What the economic shutdown means for education funding promised in HB 3
Texas legislators invested more than $11 billion in school finance reform in 2019. There was $6.4 billion in new money for public schools as part of House Bill 3 (HB 3), plus $5.2 billion to buy down school property taxes.
The state will be hard-pressed to fulfill the landmark legislation’s goals without a quick economic recovery. It may be difficult to sustain both the new investments in public education and the state buy down of property-taxes.
The Texas Legislature built in a modest revenue stream last session that provides limited funding for HB3’s promises. It’s called the Tax Reform and Educational Excellence fund.
The money in the Tax Reform and Educational Excellence fund comes from:
- Revenue appropriated from the last state budget
- Limited disbursements from state endowments
- Online sales taxes
- Severance tax revenue diversions provided by the Constitution (to be used for the property tax buy-down)
But just like the franchise tax passed in 2006 to help compensate for tax compression, the fund cannot be expected to fully sustain the additional costs incurred by tax compression and education funding increases.
School districts have worked quickly to move to remote learning and have incurred a litany of coronavirus-related costs, including:
- Paying for deep-cleaning campuses
- Purchasing distance learning materials, new software, and technology
- Delivering meals to students
“When students return to schools, they’ll be all over the place academically, and many will be dealing with emotional trauma. Academic interventions and counseling costs will dramatically increase. The question is by how much,” said Gonzalez.
Coupled with the state’s grim revenue picture, the new property tax revenue caps established in HB 3 will further exacerbate the shortfall of funds available to support public schools. The revenue cap limits school district budgets to no more than 2.5 percent more than the previous year’s revenue.
If schools need more money than the 2.5 percent increase in their budget to cope with the fallout of this pandemic, they’ll have to hold a costly tax ratification election.
“School districts are hamstrung by the cap at the worst moment,” said Gonzalez. “And because the state is obligated to make school district budgets whole, the state will be on the hook for a greater share of public education funding as both state and local tax revenue decline.”
What state leaders can do
When the Legislature meets in January, they’ll be responsible for evaluating the impact of this recession and how best to address it—likely through a mix of budget cuts, funds from the ESF, and allocating federal stimulus dollars. But that doesn’t mean state leaders will wait until 2021 to do anything.
Comptroller Hegar said he has the authority to access the nearly $8.5 billion available in the Rainy Day Fund. It’s unclear if that would be enough to bridge the budget shortfalls that are likely during the second year of the current biennium. And there’s still next biennium to consider.
“State leaders aren’t likely to consider completely draining the Rainy Day Fund, so there will be fewer dollars to allocate to essential state services like public education, health and human services, and infrastructure,” said Gonzalez.
The downward pressure revenue caps place on local property tax rates leaves school districts with limited moves to work around lost state revenue. Some public education advocates are questioning if the state can afford the cost of the property tax rate compression right now.
Taking a cue from the temporarily waived Open Meetings Act provisions, some have suggested temporarily waiving the property tax buy-down and revenue cap provisions as well.
The federal government’s $2 trillion economic aid package directs $31 billion to states, school districts, and institutions of higher education for costs related to the COVID-19 pandemic. There’s also $13.5 billion for schools through formula grants to states and another $307 million that the US Department of Education will distribute to the Texas Governor Greg Abbott’s office to help schools maintain instructional continuity.
Remember, the 2009 stimulus created the fiscal cliff and 2011 budget shortfall that ended in billions being cut from public education. Reverberations from the fall off that cliff continue to be felt today.
What local school leaders can do
It’s critical that school leaders start talking with legislators and their communities about the risks to school funding now.
Have your administration create outlines and graphics that illustrate what budget cuts would mean for your schools.
“Create scenarios that include 5 percent, 10 percent, and 20 percent reductions in funding. Include specific details about how these cuts will impact your schools, students, parents, and the taxpayers in your community,” said Gonzalez.
Start having discussions about those scenarios in board meetings. Tell your legislators to resist the urge to use one-time federal stimulus aid to prop up the state budget without a plan for filling the gap once the federal aid is gone.
“Everyone is going to have to reduce costs and make cuts,” said Gonzalez, “but repeating 2011 really should not be an option. We can learn from our mistakes.”