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Funding Alternatives for State of Alabama Education

The State of Alabama’s education budget is shrinking, as is the State’s overall budget. When the FY 2010 education budget was passed, Governor Bob Riley stated that “it’s a budget we can work with. ” However, the new budget barely maintains current supplies and teachers’ pay and benefits, doing nothing to improve the status quo. The current shortfall situation is not expected to improve in the immediate future—and to fall behind in educational funding means falling behind in academic excellence in the school system.

What Alabama needs is an infusion of additional cash to keep up with classroom needs in the coming year and the years ahead. If that cash can’t be found through current state revenues, it must be found from outside sources—new revenues from nontraditional means outside the current state tax structure. Alternative sources such as a state lottery and new taxation will be explored. Alternative Funding Options For Education in the State of Alabama The recently passed Alabama 2010 state education budget preserves teachers’ jobs, but not their benefits at the current level.

To keep their current benefit levels, teachers will need to pay more for health insurance, in keeping with a national trend for state employees in all 50 states. Status of Current Budget for State of Alabama Education As of April 30, 2010, State Legislators agreed that the approved budget was designed primarily to protect some 48,000 state-funded teaching positions. Legislators acknowledged that even with this goal, it is likely the current recession might result in layoffs in some school systems.

The affected systems pay an additional 2,000 teachers with local tax revenue, which is declining. Richard Lindsey, Chairman of the Alabama House Budget Committee, indicates that the Legislature is determined to save jobs without increasing class size or shortening the current school year. However, even if jobs are saved, teachers face decreased real income because health insurance costs are continuing to rise and all educational employees (teachers, support workers, etc. ) will either have to pay higher co-payments or higher monthly premiums for coverage.

Paul Hubbert, executive secretary of the Alabama Education Association, states: “The Legislature thought it would be better to have a little higher cost for health insurance than to loose 3,700 teaching jobs. ” (State of Alabama, “Budget Summary,” 2010). Students are losers, too. The budget provides only enough money in the category for textbooks that will replace the disposable workbooks used in kindergarten through the third grade. There is no money available for new textbooks in sciences, math, or English, or history to offer students the latest in educational curricula.

Even replacements for used or worn-out texts are not available. If the student population in any classroom increases, the newcomers will go begging for textbooks or will have to share textbooks on a continuing basis. Further, no allocation is made for increased technology in the classroom. On the plus side, the budget allocates level funding for popular programs to improve performance by Alabama students in reading and in math and science. (How this is to be accomplished without up-to-date texts and teaching supplies remains a mystery. ) It also offers funds for distance-learning programs.

Such programs allow a teacher in one location to teach students in other locations through the use of television and other remote access technologies. There is no standing still in education. There is no status quo. In the classroom, if education is not progressing, students will fall behind quickly. Outdated textbooks and a lack of computer technology in the classroom causes students to lag behind until they become dead last in education needed for success in the 21st century. Once a decline begins in this arena, it becomes an avalanche.

While students can become disinterested without the necessary educational tools, teachers who don’t receive pay increases and benefits comparable to employees in the private sector often start leaving for better paying jobs in the private sector. The lack of adequate up-to-date learning tools frustrate teachers, and disillusioned teachers are more likely to leave their jobs for greener pastures. Where do the inadequacies in the budget fall for the State of Alabama? The education budget for the 2010-2011 school year is about 3 percent more than what schools are getting in the 2009-2010 scaled-back spending plan.

But it is about 18 percent less than the budget for 2008, when the state had its biggest education budget ever. (State of Alabama Budget Summary) Although Alabama has allocated additional money for public schools over the past two years, it still lags behind the national average in spending per pupil. For the latest census statistics years available, public schools across the United States approximately 4%. However, in that same period, Alabama schools spent a little over $2,000 less per pupil than the national average, even though this amount represented an increase of 2. 6 percent over the prior year. (Pippins).

In 2004, the Annual Survey of Local Government Finances ranked Alabama 44th overall in student expenditures. (Pippins). When the figures for 2009 are released, it is anticipated that student spending in the State of Alabama will rank even lower. So what does this mean for the future of public education in K-12 for the State of Alabama in the next few years? The most likely scenario in the absence of additional revenue sources is that Alabama will drop even lower in per pupil spending. There is a direct correlation between funding and pupil performance—and a similar correlation between economic outcomes following graduation.

Without a solid foundation in language arts and sciences, high school graduates tend to veer away from colleges and seek immediate employment or venture into trade schools. A lack of higher education among the adult population results in lower income per capita with the concomitant effect of a decrease in tax revenues for the State due to lower pay among its employed citizens and a decline in the number of professional workers in the State who make up the most solid base of tax revenue in the form of property taxes for home ownership and state income tax and sales tax.

Other adverse trends in the State of Alabama, which are not exclusive to that state but which have a heavy impact on its revenues, include a foreseeable decline in NASA’s space program spending in Alabama. NASA’s programs have an uncertain future, and the State has received considerable revenue in the form of taxes from employees of NASA. Indeed, the space program has provided a sturdy economic base for the city of Birmingham and its environs. At this point, an increase in unemployment based on NASA’s probable layoffs as the shuttle program winds down can be anticipated.

With unemployment on the rise, the tax revenue will inevitably continue to shrink over the next few years. Economic Stimulus Package’s Effect on Revenue for Alabama Education The Federal Economic Stimulus Package contains funding to ease unemployment and to enhance education. However, in many states—Alabama among them—the funding has been partially rejected. Recently, Governor Riley rejected $100 million from the Federal Economic Stimulus Package that would have provided funds to alleviate unemployment.

Governor Riley stated, “It’s illogical for anyone to think government can expand benefits and no one has to pay for it. ” (Associated Press). Riley was concerned that acceptance of the funds and the requirements that accompany them would lead to higher business taxes for the State. (Wall Street Journal) Was the governor right or wrong in his decision? In the immediate term, boosting employment can only be seen as a good thing, whatever the future may hold.

The $100 million earmarked for alleviating unemployment in Alabama would, if nothing else, buy some time for an economic recovery to take place and free up more state budget funds for education. Overall, Alabama is slated to receive about $3 billion from the $787 billion stimulus package. According to White House officials, the stimulus bill is estimated to create or save 51,000 jobs. (ARRA) In light of the funds refused by Governor Riley, Joyce Bigbee, Legislative fiscal officer for the State of Alabama, estimates a $600 million shortfall for 2011 (ARRA).

Sen. Rodger Smitherman, rejects the governor’s assumptions, saying: “There is no reason to believe our record unemployment will be this high four years from now when stimulus money ends, so our benefit costs should decrease, not increase. ” Associated Press) Regardless of the total Stimulus Package funds allocated to the State of Alabama, the funds earmarked for education are substantially lower than will meet even the present year’s needs to upgrade the K-12 school systems and improve their rating in the national ranks.

The Federal Economic Stimulus Package is essentially a stop-gap measure and doesn’t solve the State’s ongoing budget shortfall for education. According to federal guidelines, ARRA represents an injection of funds that is temporary. For the most part, the ARRA funds are available for only two to three years. Federal guidelines require that the ARRA educational funds are to be invested in ways that won’t require continued infusions of funds after the ARRA funding limits expire.

In other words, don’t start a program as a pilot that will require continued federal money to sustain beyond the two or three years these stimulus funds are available. These guidelines provide a clear warning that no state should expect this continued support and should sustain its educational program long term through state funding sources without continued federal aid. Another source of potential economic stimulus traditionally relied on by all states, the housing industry, is viewed as an unlikely option for additional revenue for education over the next few years.

The housing industry decline, both in construction and sales, will continue to have an adverse impact on the State of Alabama as the market readjusts to new, lower price levels. Construction slowdowns mean more unemployment and decreased tax revenues, which cause long-term impacts on available funds for education. A bill has been introduced in the Alabama Legislature to challenge Governor Riley’s refusal of the funds to alleviate unemployment from the Economic Stimulus Package. (Wall Street Journal) Preliminary reports indicated that Under the Economic Stimulus Package, Alabama could receive up to $1 billion towards education.

However, the reality is that the final amount might be as little as $100 million. In either event, these revenues would provide a temporary measure of relief for educational needs while a better solution is being worked out. Options for Solutions to Educational Funding Needs If the next few years continue to show a slowdown in state revenues, what long-term solutions are available? The obvious solution would be an increase in taxation, either related to property, real or personal, including ad valorum taxes on auto licenses.

A second option would be increased sales taxes, including the so-called “sin tax” on such items as cigarettes and liquor. None of these funding sources are likely to be easily accepted by the population already stressed by high unemployment rates and property foreclosures. Yet they should be examined for their potential as an ongoing solution to education funding shortfalls. A third, more creative, solution would be the institution of a state lottery, with the proceeds earmarked for education.

The neighboring State of Florida has touted its state lottery as an educational funding resource for years, and it should be examined for its effectiveness when considering a similar solution for Alabama. Criteria for Examining Revenue Source Effectiveness The criteria for each of these potential funding sources should include the following: 1. Is the source likely to produce sufficient revenue to meet educational needs? 2. Regardless of potential unpopularity, will the funding source be accepted by voters or will it create a political backlash? 3.

Will the funding source be sustainable over the long term? Real and Personal Property Taxes Increased property taxes on real estate are often used to meet budget shortfalls in many states, but in a time of economic recession when both construction and real estate sales are declining in revenue, the potential for resulting in real gains in revenue for education are unlikely. In fact, an increase in taxes that affect either construction or sales or both is likely to further depress the real estate market and add an undue burden to current property owners.

Any increase in property taxes, whether in the form of annual property taxes or taxes on the sale of real estate are likely to have a political backlash from voters, making it probable that a bill to increase such taxation would not pass the State Legislature. A more likely source of tax revenue, which many states deem equitable, is to increase license fees for vehicles, or as in the case of California, to use an ad valorum tax base for auto license fees, which provides much higher fees for licensing new or luxury vehicles and which declines as the car ages.

It should be noted that California has not earmarked such fees for education and as of the first quarter of 2010, the State of California is facing such massive shortfalls in every arena that residents are receiving IOUs for state tax refunds. California currently ranks 48th in its business climate compared to other states. Alabama currently ranks 19th. Obviously, California has not come up with a suitable tax solution to its overall economic problems, much less those related to education.

Increased auto license fees, however, have a certain logic that may have political acceptance if not political appeal to Alabama’s citizens. The theory behind using auto license fee increases for education is that the burden for education is more equitably distributed over the entire population, not merely falling on real estate property owners alone. Families with children who are renters do not participate in funding education if the tax burden rests on real property owners through increased property taxes.

However, almost every family in the state owns one or more vehicles and therefore can contribute more fairly toward the cost of education. Regardless of whether real property is taxed or vehicle licenses are increased, the argument can be made that a sound educational system benefits everyone in the State for the future by having the next generation better educated and therefore better able to earn a fair wage. State Sales Tax as An Educational Funding Source Another potentially equitable solution would be to increase the state sales tax rate, which currently stands at 4 percent, one of the lowest in the nation.

Prescription drugs are the only exemption to the state sales tax in Alabama. Increasing this tax rate by 1 or 2 percent would provide a continuing stream of revenue and should be considered as a partial solution. However, it should be pointed out that some states which have a higher sales tax rate also exclude food from sales tax as well as prescription drugs, so the net gain in tax revenue might be miniscule if food were to be exempt from tax—and excluding food purchases might be the only way that an increased state sales tax would be palatable to voters.

If state sales tax revenue is to be considered as a source for educational funding, the rationale behind it is that it would affect all tax payers in the state in proportion to their expenditures. “Sin Tax” Revenues for Education The federal increased taxes on tobacco and liquor have stirred angry voters to protest but the bottom line is that the revenues continue to rise, albeit only by a percentage point or two. Some states, notably Kentucky, have added their own additional taxes on these items, and they have not seen a notable decrease in sales in either tobacco or liquor as a result.

Even though voters protest, Stephen Voss, University of Kentucky political scientist, states he doesn’t expect “much political fallout for politicians who vote to increase sin taxes, especially in the Bible belt. ” (MSNBC News). According to Voss, “You rarely see a case where people campaign criticizing their opponents for taxing booze and cigarettes. Voters aren’t going to show a lot of sympathy to the sin industry. ” If the State of Alabama were to increase taxes on tobacco and liquor on top of the federal “sin tax,” and if the state were to earmark these funds for education, Alabama might see some modest gain in educational revenue.

However, to anticipate that the funding would be sufficient to solve educational shortfalls would be far too optimistic. Tax Increases Not A Complete Solution When viewing the overall tax increase option for the State of Alabama, all potential sources of increased tax revenue would bring only modest gains and do not present a long-term solution for the State. In the final analysis, short-term gains, if any, would be highly unpopular among the state’s inhabitants in a declining economy. A more creative solution is needed to span the next few years and the decade ahead.

Overview of Creative Options The first option perhaps might not be called creative except in the sense that it offers an alternative to the current budget stresses the State faces. This option calls for removing all the educational “frills” and concentrating on the traditional reading and math skills needed by all students. Music, art, athletics all fall in the category of enhancements to the basics of education. Concentrating on a “bare-bones” approach to education would save some funds that could be allocated to updating materials for classroom teaching.

It would also eliminate a number of teaching jobs in these auxiliary fields in education. Yet to make such cuts would limit the options for students to explore talent that might be developed which could lead to rewarding careers. If these programs and classes are not eliminated by such drastic cuts, a collateral option would be to offer them only as supplementary programs for which parents must pay. However, this option has the effect of making educational opportunities available only for those who can afford them, a concept that is contrary to the basic tenets of a free public education for all.

Creative Funding Through A New Source: A State Lottery One of the sources of revenue in Florida, neighbor to Alabama, was the institution of a state lottery in 1988. The revenue from the lottery allocates 39 percent of the funds collected to be placed in the Educational Enhancement Trust Fund. Of the remainder of the money collected, 50 percent is allocated to paying lottery prizes and the rest goes to paying employees and operating expenses of the lottery. If anything is left from either of these categories, it is placed in the Educational Enhancement Trust Fund at the end of the fiscal year.

It should be noted that the term “Educational Enhancement Trust Fund” is not exactly an accurate representation. This fund has been used to replace some of the traditional state appropriations for education instead of being an addition to it. If Alabama should adopt a state lottery as a source of revenue, this pitfall should be avoided because the net effect is to lessen the total revenue available to schools. Instead of “enhancing education,” the lottery funds have wound up being used to fund day-to-day operating expenses for the school systems.

From 1988 when the Florida lottery started to today, the amount of the state budget set aside for education has declined by 11 percent, with the lottery making up the gap. (School District of Palm Beach, brochure). Recommendations for Education Funding After examining all the potential options for future funding of education in Alabama, a need for certain guiding principles in the choices made become clear. First, any new funding source should not be used to replace current state budget funds but only to increase the total amount available for education.

This was a mistake made in Florida which had the opposite effect of the original intent of funding derived from a state lottery. Second, the funding option or options chosen should have a long-term continuing positive impact on education systems, starting with K-12 as a priority. If students don’t successfully navigate the first years of education, there is little hope they will prosper academically in any institution of higher education. This means that priority should be given to new textbooks, classroom technology enhancements, and adequate salaries and benefits to attract and retain the best teachers.

Third, any funding options should have the lowest feasible cost impact on the residents of the state, particularly during the current recession. Substantially increasing real or personal property taxes is an example of high-impact taxation on the state’s population. A Combination Solution The best solution at the present time is one that combines taxation, with a sunset law, or at least a built-in provision to re-evaluate the need for such taxes, in the next five years and the initiation of a state lottery with a similar provision.

The lottery, if properly structured, can generate substantial revenue to meet the needs of the scholastic system. It has several advantages. First, it generates increased employment (although at modest levels) for workers to maintain the lottery. Second, it is self-sustaining if the funds from the lottery are allocated appropriately to provide prize money, operating costs, and educational revenue. Thus, the lottery is not a drain on state resources needed for other purposes. Prize incentives stimulate participation by residents and occasionally by tourists or business travelers.

The lottery is essentially a no-cost, revenue-generating source of money for education. While the potential for a lottery may seem entirely golden, there could be drawbacks that should be examined. In a weak economy, people have less disposable income and participation levels might lag behind expectations. Likewise, there is a potential ethical and/or moral consideration involved. Some people may see the lottery as a legalized form of gambling, and in the strictest sense, it is. Those who buy lottery tickets are gambling on winning with their purchases.

The odds on winning, of course, depend on how many tickets are sold for any drawing. In Florida, the odds of winning the major jackpot are 1:22,957,480. (JustLottery. com) Much smaller odds on low-dollar wins still make the lottery attractive. Regardless of the odds, a lottery is a gamble on winning, and may meet with moral objections in some sectors. If the option for a lottery is put to Alabama voters, it seems likely that the potential for winning will outweigh any moral objections among the general population.

The second revenue source might be a slight addition to taxes on tobacco and/or liquor which will impact only the percentage of the population using tobacco or liquor. The argument can be made that the impact on the general population is lessened. Additional license fees on vehicles would be less likely to find voter acceptance because almost everyone in the adult population would be affected by the fees. These increased taxes, or sales tax increases, would find far less support than the introduction of a state lottery, which remains the best, most creative source for revenue in an economic recession.

References 1. White, David, “2010 Alabama Legislature: Education plan ‘We dodged a bullet’,” The Birmingham News, March 29, 2010. 2. State of Alabama, “Alabama Stimulus Recovery,” March 20,2009. 3. Pippins, Erica, “Alabama Below Average in Spending Per Student,” Montgomery Advertiser, April 4, 2006. 4. Associated Press, “Alabama senator seeks jobless money governor rejected,” March 4, 2009. 5. Wall Street Journal, “GOP Governors face fights on stimulus,” March 11, 2009. 6. State of Alabama, “Alabama Stimulus Recovery,” March 20, 2009.

7. American Recovery and Reinvestment Act, “Estimated job effect,” March 20, 2009. 8. Montgomery Advertiser, “Schools await final word on federal aid,” March 22,2009. 9. Mish’s Global Economic Trend Analysis, February 22, 2010. 10. “State Sales Tax Rates for 2009,” (with projections for 2010) Money-Zine. com. 11. MSNBC News and Associated Press Reports, March 24, 2009. 12. School District of Palm Beach, “Florida Lottery Facts: Where Does the Money Go? “, Brochure, 2004. 13. “Florida Lottery Games,” JustLottery. com, no date.

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