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STIMULUS SHELL GAME?: U.S. Department of Education’s Inspector General Warns that Some States are Using Education Stimulus Dollars to Free Up Money for Non-Education Items

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"From the very beginning, we have made it clear that this education stimulus funding is intended to supplement local education dollars, not replace them."

An internal memorandum from the U.S. Department of Education’s inspector general warns that some states are using stimulus funds to replace money they have cut from their education budgets rather than boosting their investments in education. The memo acknowledges that although this practice may be allowable under the terms of the American Recovery and Reinvestment Act (ARRA), such a reduction “may adversely impact the achievement of the education reforms.”

The program in question is the State Fiscal Stabilization Fund (SFSF), which received $53.6 billion under ARRA. Of the total, $48.6 billion was designed to go to states “in exchange for a commitment to advance essential education reforms to benefit students from early learning through postsecondary education,” according to the description of the program on the department’s website. The website also says that SFSF funds will “help stabilize state and local government budgets in order to minimize and avoid reductions in education and other essential public services.” The final $5 billion of the SFSF will be awarded by the department on a competitive basis through the “Race to the Top” and “Investing in What Works and Innovation” programs.

In order to receive the first portion of its SFSF allocation, a state has to agree to a number of assurances, including a “maintenance of effort” (MOE) requirement that says a state will provide at least as much money for elementary and secondary education, as well as public institutions of higher education, as it did in Fiscal Year (FY) 2006. However, according to the memorandum from the inspector general, some states’ budget proposals would reduce state support for public education back to the FY 2006 levels and replace the missing funds with their SFSF allocation to free up states’ resources for non-education budget items-in plainer terms, these states are cutting the amount of state funds they devote to education and are using federal funds to make up the difference. Depending on the level of state resources, such a move could reduce the percentage of the revenue that a state spends on public education.

In the memo, the inspector general cites examples from three states-Connecticut, Massachusetts, and Pennsylvania-to demonstrate how SFSF is affecting decisions on state education budgets. In Connecticut, the governor’s budget proposal, released on February 4, 2009, called for flat funding for the state’s primary K-12 funding formula at $1.889 billion for FY 2009, 2010, and 2011. But when the governor submitted Connecticut’s SFSF application to the U.S. Department of Education on June 2, 2009, she reduced state funding for public education to the FY 2006 level of $1.62 billion-the minimum amount of funding necessary to meet the MOE requirement in ARRA. As noted in the table below, such a change in education funding would represent a reduction of more than 14 percent, compared to a less than 1 percent reduction in the rest of the state’s budget.

stimulus shell game

In Pennsylvania, at the time of the memorandum, the governor and state legislature were engaged in budget discussions. Under the governor’s plan, Pennsylvania would use its SFSF allocation to increase the state’s basic education subsidy by $418 million in FY 2010 and $735 million in FY 2011. On the other hand, the legislature proposed reducing education funding and using SFSF funds to maintain the FY 2010 and FY 2011 basic education subsidy at the FY 2009 level.

In Massachusetts, the governor’s original budget proposal for FY 2009 included a $223.2 million increase to the state’s primary K¬-12 funding formula, Chapter 70 education aid. In October 2008, the governor announced reductions in the state’s budget to cover revenue shortfalls, but Chapter 70 was unaffected. In January 2009, the governor proposed further reductions, but again, Chapter 70 was unaffected. But in May 2009, after the enactment of ARRA, the governor announced a plan to reduce funding for Chapter 70 by $412 million and use $412 million of the state’s SFSF allocation to fill the hole.

In order to address these budget shell games, the inspector general makes two recommendations to the U.S. Department of Education. First, it suggests that the department “implement a process to track state support for elementary and secondary education, as well as for public institutions of higher education, as defined in state SFSF applications, to determine the extent to which State funding on public education is being reduced.” Second, it recommends that the department “establish and implement a process to ensure that states have met the MOE requirements and assurances prior to awarding additional SFSF funding.”

In response to the memorandum, the Office of Elementary and Secondary Education at the U.S. Department of Education stated that the department “became aware” that the MOE provision could potentially result in states reducing the amount of education funding in FY 2009 through FY 2011. In an attempt to discourage these reductions, the department proposed that states be required to show whether and to what extent the percentage of the state’s total revenues were used to support public education for FY 2009 as compared to FY 2008.

As reported in an Associated Press article on the memorandum, U.S. Secretary of Education Arne Duncan said that some states’ actions seem to be contrary to the purpose of ARRA. “From the very beginning, we have made it clear that this education stimulus funding is intended to supplement local education dollars, not replace them,” Duncan said. “When the spending reports are made public in October, states will be held accountable by the public and the department on how they used education funding.” Duncan has also said that those states may hurt their chances at receiving funds from the $5 billion “Race to the Top” and “Investing in What Works and Innovation” programs.

The Associated Press article points out that lawmakers in Congress “decided not to prohibit states from using the stabilization money to replace precious state aid for schools,” it reads. “They required states to maintain spending on K-12 schools and colleges but only at 2006 levels, which allowed most states to make significant cuts to education.”

Read the inspector general’s memorandum at http://www.ed.gov/about/offices/list/oig/auditreports/AlertMemorandums/l03j0011.pdf.

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