Fractals of Change

Readers’ Guide to the Education Funding Announcement

"$52 MILLION IN RECOVERY FUNDS NOW AVAILABLE FOR VERMONT TO SAVE JOBS AND DRIVE REFORM," says the headline of today's press release from the Federal Department of Education (www.ed.gov/news/pressreleases/2009/07/07272009.html). "Application for Part 1 of Vermont's State Stabilization Funds Approved Today," the subhead explains.

This is formula money, money we knew we were going to get as long as we filled the form out correctly; still, it's nice to know that we DID fill the form out correctly (you can read it at www.ed.gov/programs/statestabilization/stateapps/vt.pdf). Vermont's method for funding local schools is unique and we had a lingering nervousness that someone somewhere in Washington wouldn't understand and that might cause complications in getting our money.

The $52 million is the first installment of $77 million that Vermont will receive to help with funding of K-12 and public institutions of higher learning over the two year life of the stimulus bill (aka American Reinvestment and Recovery Act or ARRA). Actually, though, we prudently budgeted half of this for each year so won't draw down all that we can from the feds until later. BTW, the rules only allow you to draw down this money immediately prior to sending it to the schools so we can't just get it all and put it in the bank to earn interest.

This money is NOT a windfall to the schools who will receive it (but there is a windfall coming, see below); it is aid to the State so that it doesn't have to either cut its level of support for schools or take money away from somewhere else – that's why it's called "state fiscal stabilization fund". The money will probably make up part of the September money the State sends to school districts, but, other than the new reporting requirements that come with this federal money, that really won't make any difference to the districts. They'll get what they would've gotten anyway.

There are strings besides the reporting requirements. For one thing the State has promised to do no less than level fund the schools at the higher of the 2008 or 2009 levels for 2010, 2011, and 2012. That was part of our application. But note that the stimulus money only lasts two years. Unless the economy has come roaring back by then, we're going to have a hole to fill and cutting aid to the schools, for 2012 at least, won't be an option. It's not clear constitutionally how this binds the future legislature which makes the budget for 2012, but let's not go there now.

Other strings include all kinds of reports and commitments to improving education in ways we've already committed to improving it.

The press release goes on to say "To date, Vermont has received [sic] nearly $46 million in education stimulus funds—representing a combination of funding for Title I, IDEA, Vocational Rehabilitation Grants, Independent Living Grants and Government Services funds. On April 1st, Vermont received [sic] nearly $13 million in Title I funding and more than $14 million in IDEA funding.  This represents 50 percent of the Title I and IDEA funding Vermont is eligible for in total." It is NOT accurate to say Vermont has RECEIVED this money; in fact, we haven't although most has been approved and we can draw it down. Applications are available to schools at http://education.vermont.gov/new/html/dept/recovery_act.html and that page also has links to district-by-district allocations.

The Title I and IDEA funds go to school districts by formula and DO represent a substantial increase over the funding schools usually receive under these programs – but only for two years. So schools are going to have to be very careful not to ratchet up expenses on these programs to a level that will not be sustainable when the ARRA tap is shut.

Leveraged Stimulus

Q. When does $72,000 equal $1 million?

A. When leveraged, of course.

The US Department of Agriculture (USDA) is taking advantage of this financial magic trick. The stimulus bill (aka American Recovery and Reinvestment Act or ARRA) allocated $2.5 billion to USDA to encourage broadband buildout in unserved and underserved rural areas. If USDA gave out all this money as grants, there would be $2.5 billion to be divided among applicants from various states. But USDA has announced that it will give them money out as a combination of grants and low interest loans and will actually be able to give out between $7 and $9 billion. The catch, of course, is that most of this money will have to be paid back. Still, for both stimulation and broadband penetration purposes, this isn't a bad idea because more actual money will go into projects than would have been possible with grants alone. If things go well, more and bigger projects'll get done and more people'll be put to work.

Here's how the leverage magic works: USDA takes some portion of the money and uses it to set up a loan loss reserve. For this calculation they assume that there will be $72,000 in losses for every million dollars they lend; this $72,000 is the COST to the USA of lending $1 million. Of course the USA also has to pay interest but the borrower is expected to pay interest approximately equal to the federal borrowing cost so there is no net interest cost to the treasury. So let's do some math:

First divide one million by 72,000. That answer is approximately 14 meaning that one dollar in loss reserves will "pay for" $14 in loans. Another way of saying this is that RUS believes that it will get back $13 in principal repayments for every $14 it lends. So, if USDA takes $500,000,000 million of the $2.5 billion which it has been allocated and uses this as a loan loss reserve, it can make $7 billion in loans and expect to "lose" no more than $500,000,000. That's apparently what USDA intends to do and, assuming they are discerning enough in making their loans so that their losses aren't higher than anticipated, this is a pretty good way to get lots of programs going.

But now suppose you're a telco which formerly didn't find the reward of building in a rural area worth the cost; will this program convince you to build affordable broadband in areas you previously bypassed? Obviously if you get grants – free money – that can be pretty persuasive. You invest less but get back the same return. But loans have to be paid back. Couldn't you have just borrowed before and built? Why would you want to do that now?

My guess is that the loans will help to incent the development of projects which wouldn't have happened otherwise. I know that there are companies prepared to apply for them in Vermont. One reason these loans are so attractive is simply the fact that they're available. This recession began as a credit contraction and, to a large degree, still is. Credit is very, very hard to get; patient money even harder to find. The rewards from building in a rural area take time. People who didn't have broadband before don't have a perceived need to get it immediately; their neighbors aren't posting to YouTube or living in Facebook; the schools aren't giving online homework. People who couldn't get broadband may not have the equipment to use it. The market develops but it takes time. The availability of any money at all is an incentive; the availability of money which can be paid back slowly as the market develops is further incentive.

Also the interest rate on the USDA loans is approximately the borrowing cost of the US government – just over 3% for five years and under 5% for ten years. On their own, if they could get loans at all, many of the companies who might build in rural areas would have to pay interest rates which are at least twice that. The difference between what loan applicants pay USDA and what they would pay in the open market is just as good as a grant – it's cash that stays with them instead of leaving.

The rules for broadband funding were published last week. The forms and instructions are available online at http://broadbandusa.sc.egov.usda.gov/. The deadline is August 14^th. The scramble is on. USDA making some of its (our) money available as loans means that there are more funds nationwide and more potential for bringing Vermont closer to its goal of universal broadband penetration – a key component of SmartVermont.