What can state proposals for ARRA Education Stabilization Fund Spending Tell Us about the “Funding Cliff”?

The American Recovery and Reinvestment Act of 2009 (ARRA) contains $39.5 billion in education stabilization funds intended to buoy states’ K-12 and higher education budgets during the Great Recession. ARRA designates that states—through their governors—must formally apply to the U.S. Department of Education for these funds, and that the Department will release these funds in two phases, with all state spending to occur by the end of FY 2015. For Phase I, governors submitted applications to the Department that specified how much and when they intended to use the stabilization dollars in the allowable spending timeframe.

Whether a state spends its stabilization dollars now or later may contribute to the degree the state will experience a “funding cliff.” The federal stimulus aimed to safeguard education budgets at the onset of the Great Recession. However, in many states, the projected return to previous peak revenue levels is either unknown or sometime after FY 2012. If these projections hold true, and if states have spent the bulk of their stabilization dollars in FYs 2009 and 2010, then indeed, the impending cliff may become a reality.

To determine whether states have stabilization dollars remaining for FY 2011 and beyond, NCSL recently compiled and analyzed the data in the applications for stabilization dollars (see NCSL’s Intended Uses of Federal Education Stabilization Funds). NCSL found that, in total, governors intended to use 37.7% of these education stabilization dollars in FY 2009 and 48.0% in FY 2010. These numbers indicate that 14.3% of these dollars remain to help shore up education budgets in FYs 2011 and beyond. However, plans for annual spending allocations vary widely across the states. Two states, California and Alabama, planned to spend their entire allocation immediately in FY 2009, while a full 20 states proposed to spend nothing in the first year, reserving their stabilization fund allotment to FY 2010 and beyond. 

Importantly, the governors’ proposals may not match the state reality on actual stabilization fund expenditures for three reasons:

  • State fiscal conditions have changed rapidly over the year, leading some states to revise their intended allocations (see NCSL’s State Budget Update: November 2009). For example, Oklahoma was one of only a few states not reporting a deficit when these applications were submitted; they now predict a more than 18 percent revenue shortfall for FY 2010. Such a dramatic downturn may well impact stabilization fund spending plans.
  • Legislatures‘ discretion over budget appropriations likely overrode governors intended allocations in several states (see NCSL’s report General Overview of Legislative vs. Executive Appropriations Issues for more information on this topic). For example, a budget bill passed in Rhode Island appropriates dollars from its federal education stabilization fund for FYs 2009 and 2010 that appear to contradict the governor’s intended use of those fund dollars.
  • Unused stabilization dollars from FY 2009 can be carried over for allocation in ensuing fiscal years. This scenario can play out when a recipient of stabilization dollars (e.g., a school district) did not fully spend down its FY 2009 allocation. In this case, the school district would return the remaining FY 2009 allocation to the state for appropriation in a later fiscal year. (Note: for 46 states, FY 2009 ended June 30th, 2009, which means states and local LEAs had a limited window in which to spend down its FY 2009 allocation, or use it to plug FY 2009 budget gaps.)

A better sense of the impact of the funding cliff will come as additional state action is finalized and compiled. NCSL’s State Budget Actions: FY 2009 and FY 2010 report, due out this spring, will provide a more detailed picture on actual K-12 and higher education appropriations. As states begin to close their FY 2009 and 2010 books, more information will arise as to how states utilized ARRA funds.

Published February 18, 2010.