Districts, schools search for alternative funding streams NCLB, economic slowdown strain general funds

By Frank Wolfe

As states feel the pinch of NCLB mandates and the economic slowdown, schools and districts are increasingly turning to alternative financing mechanisms to make up for funding shortfalls.

Such alternative mechanisms include Parent Teacher Organization and Parent Teacher Association fundraising, foundations and other means such as corporate advertising on school buses, raffles, bake sales and collecting money from students for parking at school.

The number of nonprofit school foundations has grown substantially in the last two decades. Such foundations were rare at the time the Ford Foundation funded five local school districts in New York City after the 1983 release of the report A Nation at Risk.

Today, however, such foundations number between 5,300 and 6,500. The National School Foundation Association estimates that 40 percent of the 13,500 U.S. public school districts have a nonprofit foundation. While higher education and private schools receive the majority of the $41 billion in educational philanthropy, public K-12 schools represent an ever-increasing share — perhaps $60 million, said Jim Collogan, NSFA’s interim executive director.

"We’re the fastest-growing area of educational philanthropy, without a doubt," he said, adding that districts’ reliance on such funding varies.

Moving away from tax increases
As the U.S. population ages, many communities are demonstrating less interest in continued tax increases to support education, according to NSFA.

"Alternative financing is growing," said Arnold Fege, director of public engagement and advocacy at the Public Education Network. "There’s no question about it as we see schools under the NCLB gun and as we see the effects of the cutbacks because of the economy."

"A greater number of school districts under NCLB restructuring are looking for these resources," Fege said.

The Education Department estimates that more than 10,000 schools will be identified for improvement next year, while 2,300 schools will enter restructuring. Yet the number of schools that exit restructuring successfully has stalled at fewer than one in five.

Economic worries
In addition to these strains on school financing, the full impact of the economic downturn will likely not be felt until next year.

"If you look at what happened during the last downturns, the impact is worse the year after it starts," said Raymond Scheppach, the executive director of the National Governors Association. Sales tax collections typically drop in the first year, followed by a decrease in income tax hauls in the second year and an increase in Medicaid funding in the second and third years toward the end of the slump.

State revenues are up just 2 to 3 percent this year on average, compared to an average of 6 percent during the last decade and a half, Scheppach said. The numbers have yet to turn negative to indicate a recession, but NGA is monitoring that as it prepares to release its annual fiscal survey next month.

The budget picture is particularly dire in four states hit hard by the housing crisis — California, Arizona, Nevada and Florida. But the downturn has also sharply affected state revenues in Michigan, New Jersey, Rhode Island and New York.

Overall, declining revenues have forced 16 states to cover almost $12 billion in shortfalls in their current budgets, compared to only seven that faced shortages in November, according to a recent 50-state fiscal survey by the National Conference of State Legislatures. In addition, 23 states are staring at a minimum cumulative budget hole of $26 billion in FY 2009.

Legal hurdles
Collogan said it is best for districts to keep foundation money as a rainy day fund, as districts typically have just 2 to 3 percent of their budgets as discretionary funding after subtracting the 85 percent for personnel and another 12 percent for things like buses, buildings and curricula. "The good thing is the money is there," he said. "The bad thing is that school districts can’t control costs. The discretionary money can get sucked up in utility and gas costs, some of which we’ve seen over the last year."

School districts and schools looking at the bleak fiscal picture must nevertheless be careful about how to go about seeking alternative financing. State laws frequently limit school districts to specific fundraising mechanisms, such as property taxes.

However, for capital improvements, such as school construction or school buses, districts typically have more latitude and may begin looking at mechanisms other than revenue bonds, such as lease/purchase agreements and interest-free Quality Zone Academy Bonds.

"I think you’ll see school districts trying unusual mechanisms for funding capital improvements, because they have the latitude to do so," said Bruce Hunter, associate executive director for public policy at the American Association of School Administrators.