A Crash Course In Creative Financing

In the old days, local schools turned to bake sales to pick up a little spare change. In mid-August, Denver public schools took a big step into the future. Some 80 schools opened their buildings to provide room and board for 20,000 people attending World Youth Day ceremonies--and raked in $1 million. Such hospitality is born of hard times. In the face of voter hostility to new taxes, the 64,000-pupil Denver system is scrambling to narrow a $31 million budget deficit this year. To close the gap, it will do almost anything--from cuts to privatizing maintenance of its copier machines to food sales.

Denver is hardly alone in the financial plight of its education system. As predictably as summer turns to fall and yellow school buses return to the roads, chronic funding problems are plaguing U.S. schools. What's different now is that the voices for change are growing. "No other sane society goes through this annual problem," snaps Martin J. "Mike" Koldyke, a Chicago venture capitalist who is trying to cobble together a plan to close a $298 million deficit in the nation's third-largest school system so classes can begin on Sept. 8.

Indeed, alarm is spreading this fall like never before. Around the nation, there's "a growing sense that many public school systems are spending more and more money and producing less and less," says Benno Schmidt, president and chief executive of Whittle Communication's Edison Project, a private school-management company. Yet as politicians, parents, educators, and business leaders try to break the back of the crisis, they're frustrated almost everywhere by anemic state budgets and rising voter anger toward higher taxes. For schools, all this adds up to tough trade-offs. Faced with the real prospect that school revenues won't grow, educators are being forced to jury-rig schemes that make do with what they have.

Lest anyone think that a little tinkering will solve the financing crisis, however, Michigan Governor John Engler delivered a stunning message on Aug. 19. Posing in front of the historic one-room schoolhouse in Greenfield Village where Henry Ford once studied, the Republican signed a bill that, starting next year, scraps the state's property tax. That $6 billion levy provides 65% of the state's school funding. "Let's face it," Engler said. "What we've had in Michigan is a 19th century system of education whose funding has been based on unfair property taxes. We can no longer accept in this state a monopoly of mediocrity."

Opponents may yet overturn the Michigan bill in the legislature or in the courts. But Engler's move underscores how fed up many voters are with the property tax, a key source of funding for most schools. In Michigan, schools may have to be funded with a higher sales tax or higher income taxes. "It's not the answer to simply do away with property taxes," says U.S. Education Secretary Richard W. Riley.

WIDE GAPS. Thanks to a broad array of forces, other states are seeking their own funding alternatives. A key challenge: court rulings that find property-tax-funded systems deliver unequal education--mainly because of economic gaps between city and suburban districts. In Michigan, for instance, per-pupil funding ranged from $2,300 to $9,900.

The trouble is, parents are loath to sign off on more taxes until they see better schools. In California, the signatures of 1 million voters forced a proposal onto the November ballot that would provide some students with a $2,600 voucher, paid from state funds, for use at parochial or private schools. The proposal likely won't pass, but it's a striking measure of popular discontent.

In the meantime, many politicians are seeking more stopgap measures. In Chicago, educators and politicians blame the sharp falloff in state funding in the past decade--from 48% to 33% of the budget, now $2.8 billion--for much of the current problem. Union givebacks and a new bond issue may tide the district over for two years, but not much longer.

Massachusetts, however, may be forced to find a permanent solution. Three times since 1978, state legislators have approved long-term plans for increased education spending--and twice they have been reined in. "We haven't had the long-term commitment necessary to do this," complains Norma L. Shapiro, chairwoman of the Council for Fair School Finance. But the state's high court ruled in June that Massachusetts must guarantee quality education in poor communities. So the legislature has agreed to spend an additional $1.3 billion annually by 2000. That likely will require higher state taxes.

Yet relying on voter approval of ever higher taxes is risky. So, cities and states are looking at new approaches within existing constraints. Milwaukee is administering a trial voucher scheme for low-income students and is considering turning over some schools to for-profit management companies. In New York City, business is helping fund 16 New Vision Schools, small secondary schools with community input in deciding curriculums. And in Chicago, executives at such companies as CNA Insurance Cos. and Harris Bankcorp Inc. are urging employees to run for local school councils.

Meanwhile, more and more states and cities are decentralizing, turning key questions on hiring, firing, and budgets over to teachers, parents, and principals. In Chicago, there are encouraging early signs that such an approach is paying off. That raises the prospect of rationing funds, with more money going to better-performing schools. "You've got to be able to reward individual schools and be prepared to change management at schools not doing the job," says venture capitalist Koldyke, who also chairs Chicago's School Finance Authority. Harsh discipline. But anything less may not be enough to get the nation's schools earning higher grades.

      CONNECTICUT   Schools face a budget deficit, teacher layoffs, cuts in sports 
                    programs, delayed opening
      ILLINOIS      Chicago schools won't open on Sept. 8 unless a $298 million 
                    deficit is wiped out
      MICHIGAN      In August, Governor John Engler abolished property taxes that 
                    provide 65% of school funding
      WISCONSIN     Milwaukee is trying vouchers for low-income students and may turn
                    over some schools to management companies
Before it's here, it's on the Bloomberg Terminal.