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Monday, February 20, 2017

How to Fund Schools Without Higher Taxes

Apologies in advance for a long article. However, this topic is important, and it needs a context. 

On February 18, the Casper Star Tribune declared, plainly:
Lawmakers have spent weeks debating a pair of sweeping education funding bills designed to address a looming budget shortfall that could hit $1.8 billion by early next decade. Before we get to education funding, let me make one point about the deficit itself. 
It is interesting to see how the narrative about the deficit has evolved in the past eight months. Just as I have foreseen:
first you deny the deficit; then, when you cannot contain that piece of information anymore because independent analysts start telling people the truth, you come up with a story that this is all about education- the rest of the budget is in balance, as we were told last fall; once the story is “out there” that this is all about funding education, you can turn up the deficit forecast to whatever alarming levels you want. 

I do not believe we will see a $900m-1bn deficit in 4-5 years. I think the deficit will stabilize somewhere around $700m. There are two reasons for this. First, the minerals industry is stabilizing at a permanently lower level of operation. They are in fact stable enough right now that they have hired more maintenance crews for oil and natural-gas rigs. There will be no rebound to the days of free-flowing milk and honey that we saw a few years ago, but there will also be no substantial decline from today’s level (not considering major, disruptive political or global events). Therefore, revenue streams from severance and other taxes paid by the minerals industry will stabilize in the next year or so.

Secondly, the national economy is going to be somewhat better off under Trump. Somewhat, not much better. On the one hand, we can look forward to substantial tax cuts that will help the broad layers of middle-class families, thereby boosting private consumption, including purchases of durables, vacation travels and a multitude of other items that people put off when their finances are squeezed. As a result, our state should see a stabilization of its macroeconomic decline. However, so long as we just maintain status quo in terms of regulations, the size of government spending and taxes, we have no macroeconomic rebound to look forward to.

Which brings us over to education funding. 

As the national economy starts doing better, any state that raises taxes will stand out even more than it has under the tepid Obama recovery. As I explained last week, Wyoming is dead last in private-sector jobs creation; to add insult to injury, six out of ten jobs are lost outside minerals. In this macroeconomic climate, even if we manage to climb above Alaska in ranking during 2017, it won’t be because we have done anything right. It will be because their legislators have been sticking their heads in the sand for even longer than ours have. 

However, if we really want to solidify our position as the nation’s absolutely worst place for private-sector jobs creation, then we should definitely start raising taxes. The better other states do compared to us, the less inclined people will be to stay here. So, having excluded tax increases, what should we do about education funding? The answer to this question has two parts, one short-term and one long-term. The long-term part is simple: since we are looking at a permanent downshift in tax revenue, a permanent deficit at current government spending levels, and tax increases are absolutely ruled out; the only permanent solution to our education funding problem is to structurally reform our entire K-12 system. With private schools and charter schools competing with public schools; with a tax-paid voucher system (paired with private foundations being allowed to supply private vouchers as an alternative); we can substantially lower the cost of educating our children without lowering educational quality.

In the economic reality we are all subject to, this structural reform is the only realistic long-term solution to education funding here in Wyoming. 

That said, even if our state legislature started today, it would take 4-5 years for us to have the system fully up and running (expect fierce resistance from six-figure salaried school administrators). Therefore, we need a short-term plan to supplement the long-term reform. 

Just like the long-term plan, the short term solution has to work within the same no-tax-hikes reality. Fortunately, the legislature is beginning to take some steps in that direction. Back to the Casper Star Tribune story from February 18, which reports on two different bills pursuing short-term education funding solutions:
The Senate bill attempts to solve what Gov. Matt Mead calls a crisis exclusively through cuts. The House bill, meanwhile, uses a broader approach that employs cuts, dipping into savings and a possible sales tax increase. The bills have been amended, substituted and debated. An additional budget amendment that requires $91 million in education cuts has sparked discussions, both in the Legislature and in the hallways of the Jonah Business Center. These legislative actions will determine the immediate future of education money in a state that’s generously funded schools for more than a decade.
A sales-tax increase is ruled out for reasons already explained, even at the seemingly innocuous 0.5-percent level. Our lawmakers must hold the line on taxes, or else we will never move in the direction of a government sized to what Wyoming taxpayers can afford. 

The main problem with the House bill in question, HB236, or the School Finance Omnibus bill, is that it focuses almost entirely on creating and restructuring – without simplifying – an already complicated formula for funding our current education system. For example, the bill suggests that
There is created the common school permanent fund reserve account. On July 1 of each fiscal year, the state treasurer shall transfer unobligated funds from this account to the common school account within the permanent land income fund as necessary to ensure that an amount equal to five percent (5%) of the previous five (5) year average market value of the common school account within the permanent land fund, calculated from the first day of the fiscal year is available for expenditure annually during the fiscal year. 
Furthermore, on page 13 under the section titled “Student transportation”, the bill develops a detailed funding formula that requires elaborate administrative resources for calculation and implementation as well as compliance follow-ups. 

This is the wrong approach. It will not stabilize school funding. Why? Because none of the funding measures in the bill ties school funding to actual tax revenue. 

There is a solution to this problem. Let me get back to it in a moment. 

First, let us take a quick look at the Senate bill. The Casper Star Tribune again: 
SF165 is sponsored by [Senator] Landen and co-sponsored by fellow Republican Sens. Bruce Burns, Hank Coe, Dan Dockstader, Ogden Driskill, Stephan Pappas and Senate Majority Leader Drew Perkins. Like the omnibus, the Senate’s bill would change to 80 percent the attendance requirements for students to be considered full time. It would also provide funding in 2018-19 for only those teachers who are actually employed by a district in the current school year. The bill also includes: A 2.5 percent and 5 percent cut to districts’ block grants in school years 2018-19 and 2019-20, respectively. However, those cuts would only roll into effect if the funding model were not recalibrated or a new funding model were not created. 
This bill is slightly better than HB236 in that it concentrates short-term school funding on spending reductions. The approach in the bill is not the best – it seems like a haphazardly stitched-together patchwork – but at least it makes a modest effort to move school funding more in line with what taxpayers can afford. 

There is, however, one measure that would improve school-funding predictability over the short term, regardless of whether we consider HB236 or SF165. If they were both amended with something like this, none of the complexities or haphazardly nature of their changes to school funding would matter:  

The sum total of all education funding, including but not limited to the formulas prescribed in this bill, must not rise faster than private-sector, non-minerals personal income in the state, during the [fiscal or calendar] year immediately preceding the [fiscal or calendar] year of appropriations. 

I will leave the legal tweaking to legislators and legal experts; the essential fiscal point here is to put a total cost cap on school funding that prevents the cost for K-12 education to rise faster than what taxpayers can afford.

For clarity, the part about personal income can be amended to specify “as measured by the United States Bureau of Economic Analysis”. 

This amendment would rule out the risk for any new funding crises in the near future and therefore give our legislators some peace of mind while they start working on the long-term funding solution for our K-12 school system.

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