Two separate issues are having a negative impact on public school funding — lower-than-anticipated state revenues and property tax caps.
The state funds school operating (general fund) budgets, which pay for teacher and other employee salaries and benefits. Public school transportation, school bus, debt service and capital projects budgets are funded by local property taxes.
The recession has translated into below-expected state revenues (from sales and income taxes), which resulted in Gov. Mitch Daniels ordering $300 million in funding cuts to schools last December. Those cuts have affected the general fund.
Statewide, those cuts have meant teacher layoffs, program cutbacks, larger class sizes and some school closings.
“Revenues for the state of Indiana are down, which means there is less money to be spent,” said Chuck Little, of the Indiana Urban School Associations.
Until recently, part of the operating budget was funded though property taxes. About two-thirds was state funded and one-third came from property taxes. In 2008, the Legislature eliminated the property tax levy as a revenue source for school district general (operating) funds.
It is now funded by the state, primarily through sales and income tax revenue.
But when legislators made that change, they had no clue there would be a massive downturn in the economy just a few months later.
That shift, coupled with the recession, has led to the “tsunami in public school funding,” said Terry Spradlin, associate director of the Center for Evaluation and Education Policy at Indiana University in Bloomington.
Even before the change was made, some people raised concerns about the move away from property taxes, a stable revenue source, to sales and income tax, which are much more susceptible to declines in the economy.
When people are out of work, they aren’t paying income taxes, and they aren’t out buying goods and services at normal levels, which means less sales tax, Spradlin said.
Spradlin, who closely follows Indiana public education issues and finance, predicts that public school funding is going to get worse before it gets better.
State revenues continue to fall far short of projections, and the state’s cash reserve is expected to reach a low of $188 million at the end of the 2011 fiscal year. When the budget cycle started, the state had a $1.3 billion cash reserve, he said.
Given that K-12 spending is more than 50 percent of the state budget, the Legislature probably will have no choice “but to have to cut public education further” when it adopts a two-year budget next year, Spradlin said.
Property tax caps are the other major issue affecting school funding, and in particular funds for transportation, school bus purchases, debt service and capital projects, for such things as equipment and building maintenance.