Pie in the sky

Part 2. The first part of this article published in February issue of our newspaper got the attention of many readers. One of them was Robert Regnier, President of the Bank of Blue Valley:

“I read your newspaper with interest. Other than the article on the R&D Forum, the article about “pie in the sky” discusses the lack of funding for school districts in Kansas and Missouri. I would suggest this is probably a better activist avenue than the R&D Forum. Public school districts need as much support as possible at a time when the public seems to have placed a lower premium on all types of education.”

Mr. Regnier was the member of the Blue Value Board of Education for years and should know better than anybody else the financial situation in public schools.

The reality is that any budget in government agencies or organizations receiving government grants is a pie that is divided among divisions of the mentioned agencies. In school districts, buildings and administrative offices are recipients of the pie slices. Naturally, everybody wants a bigger slice regardless of the real demands. All recipients want a bigger slice from a bigger pie. This philosophy was born a long time ago, and local interests have always dominated in politics. In this aspect it is not a surprise that legislators from other counties are indifferent to the needs of Johnson county schools that have higher expenses compared to other schools in the state.

If we will analyze the budget of any public school district, as well as the budget of any agency, we will see that it consists of two major parts: the operating budget and the capital budget. The first one is intended to cover salaries, utilities, supplies, insurance, and other similar costs. The second one is intended to cover the cost of new equipment, building remodeling, and other similar expenses. The operating budget, including all special programs, forms about 75% of the district’s total budget. School districts receive grants (what tax money is called when it comes to recipients) from the federal government, state government, and local taxes that school districts have a right to collect.

According to existing law, school districts do not have the right to move funds from one budget to another. They cannot use money from the capital budget to pay salaries to its employees when they need to, and cannot use money from the operating budget to buy equipment or cover other costs that are supposed to use the capital budget.

At first glance, this system is strange, but the main reason behind this is traditional misuse of tax money by any government for decades, centuries, or even millenniums.

Before 1992, school districts could raise local taxes if federal and state funds were not adequate. However, this was good for schools in rich counties like Johnson County, but not so good for schools in poor counties. In 1992 the Kansas legislature changed the law and moved financial responsibility to the state. From now on, the state provides school funds. The total funds spent for schools in the entire State of Kansas were collected and divided among districts in accordance with a flawed formula invented by legislators. While many poor districts benefited from the new law, the Johnson County districts could lose about 10-15% of their operating budgets. To fix this problem, the new 1992 school law allowed a 25% Local Option Budget (LOB). Originally the LOB was allowed for one year only to give Johnson County schools a chance to adjust to the new situation. However, the new situation was a permanent loss of funds for the county, and this was the reason that the LOB became a permanent feature of the new school finance system.

The United States is a country with a free market economy. Whether we want this or not, every 7-10 years the country moves through periods of recessions and economic boom cycles. In the same manner the tax pie available for slicing by legislators shrinks and grows. When operating budgets grow, districts hire more teachers and administrators and install new programs; when operating budgets shrink, districts cut programs and reduce the number of teachers. This process is painful.

School districts cannot save money during good times to spend them during recessions. All money should be spent during the fiscal year. While the law does not obligate spending all budgeted money, nobody returns any money. Would they do so when they have some surplus, their budgets for the next years will be reduced accordingly.

Maintaining budgets at the appropriate levels requires legislators to cut taxes during an economic boom and increase taxes during recessions. There exist many ways to solve the problem, but the chance is very slim that it will ever be done. One group of legislators is constantly shouting “Tax cut! Tax cut!” while another is shouting “Tax hike! Tax hike!” It seems that neither group is really interested in solving the problem.

There exists a very simple way to solve the problem: allowing school districts and other agencies who have separate and fixed operating and capital budgets to borrow money from the capital budget during bad times and return them during better times. For example, the BV School District general operating budget including LOB was $104,096,879 for the fiscal year FY00 (1999-2000 school year). Their total expenditures were $152,927,825. This information is published in the State of Kansas Budget Form USD-A. Instead of draconian cuts of programs and school closings that save a few millions per year, it is much better to borrow this money from the capital budget. The question is if legislators will allow this effective remedy. This will ease or completely eliminate the necessity of tax increases in recession years.

On chart 1, state revenues are shown at a constant inflation rate and fixed taxes. While it is an extremely simplified chart, it shows “jumps” in revenue during economic booms and “shortfalls” during recessions. To stabilize the budget, legislators should cut taxes during booms, the area marked in green, and increase taxes during recessions, the area marked in red. The area marked in blue represents an operating budget stabilized by borrowing money from the capital budget. The area marked in orange represents a capital budget.

The total school budget can “jump,” but the operating budget will not change, eliminating cuts of programs, school closings, and the firings of teachers and other personnel.