School funding is a mystery. It’s complicated. It’s very difficult to find explainers that cover the entire terrain quickly and in simple language, setting out where all the money comes from and in what form. Here’s my attempt using Philadelphia as a case study.
Schools have to pay for salaries, benefits, curricular material, facilities infrastructure, school food and other costs. They do this in two ways: grants and loans.
A grant is money that you don’t have to pay back later. It may come with certain limitations and requirements, but it comes and that’s that. For school districts, the grants come from taxes the school district collects. The district, county, state and/or federal government collects the taxes (typically from real estate, but not exclusively) and directs the funds to the budget.
But grants are often not enough to cover all expenses and they come in slowly. For schools, this slowness is especially problematic since school budgets are made yearly and on a schedule. Principals need to know what money they have to work with each school year, and districts have to communicate that by a certain time. The state entities can’t collect and distribute tax revenue that quickly.
For districts with low property values and high need student populations—both urban and rural—this gets very tricky. But for every district, wealthy or not, there are one-time projects (usually related to school buildings and facilities infrastructure) that require a lot of money up front. You can’t pay for these projects with grants since they’re so different than your regular operating costs.
Enter loans. Rather than a grant, borrowers get a line of credit that they have to pay back with interest over a certain period under certain conditions. For school districts, loans tend to come in the form of bond issuance. The district sells bonds to bondholders looking for ‘steady’ investment opportunities in the bond market. This bondholder class pays money up front and the district pays it back over time with interest. Banks underwrite the process and take fees, as do consultants.
(The great thing for bondholders is that the interest payments are tax free. They can park their money there and make it back with interest and pay no taxes on it.)
But districts pay the bonds back with their regular revenue, which, again, comes from property taxes. This is a local affair. In Philly less than 10% of district funding comes from the federal government. Half comes from the city and the other half comes from the state. The city is run by centrists and progressives, who are sympathetic and want to fund the schools more in principle. But for the city to fund schools with grants it has to tax more, whether real estate or soda or whatever. There’s very little breathing room there—the population is largely poor and taxing is unpopular. Either that, or they have to go to the state government.
The state is run by conservatives who disdain the city in particular and government grants in general. They live in a libertarian fantasyland shot through with racism, backed by capitalists in the same lifeworld. The governor is centrist and sympathetic but doesn’t have a lot of wiggle room due to the conservatives controlling congress. Very few grants forthcoming there.
Of course, there’s always the federal government. But on average, the federal government provides less than 10% for any school district’s budget. We’ve seen some pretty good spending plans from Biden’s administration thus far, but nothing close to what’s necessary to make districts like Philadelphia whole.
In the current crisis, with big budget shortfalls, most people at the helms of apparatuses like school districts will do cuts. But they’ll still need revenue for capital projects and for filling gaps in operating costs. So for revenue, that leaves loans and other investments. The districts will go to the bond market and sell bonds, get loans, and figure out how to pay them back with interest. Right now, the School District of Philadelphia devotes 8% of its yearly budget to paying back the loans it took out years before. And that’s an improvement!
So those are the big takeaways: grants that come from local property taxes, state taxes, and federal spending programs and loans that come from the bond market.
david (isaac) backer 