When the Well Runs Dry

With the end of fiscal year 2011 approaching, and with it the deadline for states to spend the federal stimulus funds for education, budget holes that were once masked by federal money are beginning to emerge.

A report by the New America Foundation released Friday explores how states distributed the education components of the State Fiscal Stabilization Fund, part of the stimulus package designed to help states fill gaps in state spending. The report also helps illuminate where stimulus money helped hide major state budget cuts to higher education and the states where major battles over college funding are emerging.

The fiscal stabilization fund -- a total of about $48.6 billion distributed to states on the basis of population for distribution during fiscal years 2009-11 -- was designed to minimize cuts to education at the state level, and accomplished that goal in many states. But the fund's parameters might now lead to exacerbated problems in some states, since state revenue has not yet fully recovered to pre-recession levels.

"When the State Fiscal Stabilization Fund runs out at the end of fiscal year 2011, states will no longer have federal funding to support higher education budget gaps," the report states. "It is unclear whether many states will be able to restore higher education funding to 2008 or 2009 levels without further assistance from the federal government."

In order to receive the stimulus funding, which for most states amounted to several hundred million dollars each, lawmakers had to distribute the money at a rate that was proportional to any cuts they made to K-12, the report notes. Because federal lawmakers did not want states simply diverting money from education to patch other holes in their budget, and then fill the education hole with federal money, the law also required states to demonstrate "maintenance of effort," which meant that spending levels could not drop below what was spent in 2006.

That provision opened up the ability for states to reallocate dollars away from education and mask it with federal money. "By allowing states to cut their funding for education to 2006 levels regardless of the severity of the budget shortfalls they were facing, the maintenance of effort provision enables states with minimal budget shortfalls to cut their funding for K-12 and higher education by more than the amount necessary to balance their budgets," the report states. "As a result, these states were and are able to shift state spending that otherwise would have been used for K-12 and higher education to areas of their budgets and replace those state funds with federal Education Stabilization dollars."

Many of the report's findings are somewhat predictable. States spent a majority of stimulus money in 2010, the first full budgeting year it was available. Because K-12 education tends to comprise a larger component of most states' budgets than higher education, most states made a higher proportion of cuts and spent a higher proportion of their stimulus money in the K-12 sector. In total, about 79 percent of the money went to K-12 education and 21 percent went to higher education.

But a handful of states -- notably Colorado, Nevada, and Louisiana -- overwhelmingly put the federal money into higher education, meaning they made large cuts to public colleges and universities. In 2009, Colorado spent $682 million on higher education, which was augmented by $151 million in stimulus money. When it cut state support to $448 million in 2010, it patched the hole with $382 million from the federal fund.

Similarly, Louisiana, which spent $1.7 billion and no stimulus money on higher education in 2009, slashed its education budget by more than $400 million in 2010 and partially filled that hole with about $190 million in stimulus money. For fiscal year 2011, when it cut another $90 million from the state's colleges and universities, it spent another $290 million in stimulus money.

Those states, along with numerous others, are now grappling with how to make up for such cuts.

Some officials also worry that the elimination of the "maintenance of effort" standard that accompanied the federal money will lead states to slash education budgets further than before. A separate stimulus initiative that pertains to K-12 education but keeps the "maintenance of effort" standard for higher education spending extends through one more fiscal year, so colleges have at least a year before they have to worry about that.

The foundation's analysis is the second of four planned reports on the State Fiscal Stabilization Fund and higher education. The first explored changes in state appropriations to higher education as a result of the fund. The third will explore in-depth how some states used the fund, and the fourth will explore how states are coping with the loss of federal money.