How inflation screws schools
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There's inflation happening, which means that the prices of things are getting higher. If you're not a troll then you're understanding of the situation is that we've just been through a convulsion of economic crises known as the pandemic shutdowns and, just as things were maybe working themselves out, Russia invaded Ukraine, throwing the welter of globalized trade of basic stuff--most notably oil--into disarray.
What I want to work out here is how this all impacts school finance, but first the politics of the situation itself. The progressive take on the inflation--held by heterodox people, MMTers, and most leftists thinking through it--was that the inflation was transitory because of what I just said: the pandemic was effed up, specifically for supply chains, and things would even out. And they did, sort of. Another take, typically moderate and conservative, is that 'government spending' in the form of big fiscal packages like the American Rescue Plan put more money in people's pockets and thus we have 'too much money chasing too few goods' which leads to higher prices.
I still think the progressive take is the right one. If Russia didn't invade Ukraine just when the world economy was kind of maybe getting back on its feet (which is to say getting back to the normal hegemonic global capitalism thing, which is not to say that anything was 'fine' but rather that it was returning to something predictable) then things were maybe going to be alright. The reality might actually be somewhere in the middle, with bottlenecks passed forward into supply chains combined with more spending power on the consumer side. But the battle lines are drawn. In some ways, Russia's invasion of Ukraine has set back whatever post-neoliberal economics may have been zygotically developing in the confused ecology of the Biden administration. The federal government decided to get a little generous, finally, and wham things get out of whack.
Fiscal pickle
Anyway, inflation impacts everything and schools aren't immune. Just in terms of budgets, like everyone else, schools' money won't be worth as much. They'll have to pay more for stuff than they did before, which means that whatever underfunding is happening through tax grants is compounded. Bad news. But that's just the start of it.
Let's keep looking at the fiscal side. We know that schools are largely funded through property taxes. When the value of property goes up, as it has been in the last year, then the assessed value of that property (what the municipal governments understand to be the taxable value to be) goes up too. That means property taxes go up. This sucks for everyone since landlords raise rent, poorer homeowners have to find ways of paying for higher taxes, etc., but the petty bourgeoisie get sclerotic when they have to pay more property taxes. So what happens? Property tax relief. I'm seeing this happen in Philadelphia and New Jersey now, where governments are trying to find ways of taking the pressure off property owners as their taxes increase along with the prices of everything.
That's cool and all, but schools get their money from property taxes, which means that schools won't get as much money as they might otherwise. So not only does the money not go as far as it did before but there's less of it! The American Rescue Plan will help with this for a little while, at least. But it's not a sustainable thing. The money will run out in two years. Elementary school principal and reader of this newsletter, Robert Beretta, wrote an interesting piece on this situation for his own blog. Check it out.
Bond bind
Fiscal policies that determine tax grants are just one revenue flow districts have to deal with. The other is monetary policies, or stuff having to do with how much it costs to get loans. School districts get much needed financing from credit markets. They have to take out loans to keep up with their facilities projects and sometimes their operating expenditures. Usually 5-10% of a school's budget is going towards debt service. And inflation's messing that all up too.
When a school district takes out a loan they have to pay it back with interest. Their loan will get an interest rate, or how much interest they have to pay back relative to the loan amount. How do these interest rates get determined? By a lot of factors, but one of them is benchmark rates that kind of set the Overton window for what makes sense viz. the cost of loans. One of those benchmarks is set by the Federal Reserve.
The Federal Reserve can do this One Weird Trick of increasing the benchmark rates that all other loans relate to to get their sense of normal. Since 2008, the Fed has kept these rates super duper low. They call it 'quantitative easing', which basically means making loans cheap to get financial joojoo spreading around quicker, easier, and better. It's like greasing capital's wheels. We've been in a low interest rate environment for awhile now. But not anymore! The Fed is raising interest rates for the first time in decades. Why? Because it'll help fight inflation. If money's tighter all around, the theory goes, then there's less money chasing fewer goods and, bingo, lower prices.
(I should pause here and say that readers must correct me if I'm wrong about any of this, since I'm still getting a handle on it myself and it's very complicated. Economists help me out!)
Raising interest rates might help districts if it has the intended effect of making things more affordable, including property. But when it comes to districts taking out loans this increased interest rate is trouble. When the benchmark rate increases, interest rates on municipal bonds increase too. When that happens, school districts have to pay more for their loans, which takes a bite out of their debt service and slows everything down (thus the 'easing' part of quantitative easing--the opposite is tightening).
This dynamic might make school districts (or states taking loans for the districts) reconsider going to the municipal market to get a loan or refinance existing loans. The supply of school bonds decreases. If the supply decreases then, if I understand these basic economic laws correctly, then the demand for them will go up. This especially makes sense in the case of bonds because they're considered 'safer' then stocks, and given that the Fed is inducing a recession to fight inflation, ruling class yahoo investors will want to shove the dead labor they've hoarded into less volatile places to protect their investments.
If demand for school bonds goes up, then I'm pretty sure the bond yields--the rates at which they will pay out to investors--will go up because of the increased demand, which sounds like it should be good for schools, but since the interest rates are high because of the Fed then the loan is more expensive, which means the school has to pay out more for the loan on the yield, pay more for the loan itself, and money isn't going as far as it was. I think??
If I'm right then schools are going to be quite screwed for the next few years. Yet another reason to figure out how to transform our rapacious capitalist system into one that's better for provisioning people with what they need. Not only do we need public credit for public schools so districts and states don't have to deal with the bond mess, but school funding on the fiscal side should not be tied to local property value. Education should just be provided with grants from federal coffers since we mint our own money and can do anything we want with it federally. But if you're not into the whole MMT thing, then we should pass a value-added tax like basically every other country in the world--either at the state or federal level-- and 'pay for' it that way. A different school funding structure wouldn't be vulnerable to the issues I've written about today.