Education Spending and the Economic Crisis

The global economic meltdown is going to affect education budgets. States and School Districts will react to a drop in tax receipts and a credit freeze. This entry is an attempt to map out some of the possibilities for how the slowdown will play out in schools.

First – some good news. No matter what happens in the economy kids still show up in school needing an education. The market is not recession proof but it is also a core service of civilization. Unless we end up in some Mad Max dystopia there will be a market.

Second – any market will have losers and winners. There are several market trends that will be accelerated by a budget crunch and companies that are poised to take advantage of them will do just fine. If your strategy isn’t focused clearly on core funded needs you will struggle (strategic focus is a service I provide).

Normally the education market lags the general economy by 12-18 months. This cycle has already been different – many of my contacts at education companies saw the market step back as early as the summer of 2007. My theory is that falling property values which drive 30%-40% of tax receipts, are much closer to education decision makers than the usual macro-economic trends that drive the economy. Several significant states also led the way with severe budget shortages (notably Florida and California). Educators could see this one coming and acted early.

In the survey of education executives I conducted last May on Education Spending & the Economy the consensus was that the impact would be mild.

But what has unfolded over the past 3-4 weeks has the potential to have a much more dramatic affect on spending for education across the board. The good news – if it can be called that – is that educators have already acted pre-emptively to address a downturn and so many of the hard decisions have already been made. The incremental impact of the most recent developments will not be as significant as they would have been on their own.

The most immediate prospect is for a dramatic slowdown in capital spending. This will be the result of a combination of voters rejecting new levy’s and bonds because their own pocketbooks are strained and the credit freeze in the banking world. If your business is oriented around new school construction prepare to hunker down for a while.

States will have to make some hard choices. California – which has been in a budget crunch for several years – has seen dramatic increases in class sizes and an underfunded market for instructional materials. Categorical funds and lawsuits have kept the markets for basal textbooks supplemental materials that address specific populations healthy. Outside of these areas it remains a tough market. Florida has delayed adoption cycles – forcing schools to use older materials for a year or two more. If you are targeting specific states you should be building relationships with policy makers at the state level because their decisions will have a direct impact on your business.

Districts are going to be a tough sell. They will buy, but they are going to demand more proof that what you are providing will deliver benefits. They are also going to pull more decisions centrally to keep a tight rein on spending. Your sales force needs to be comfortable calling on district decision makers and you should be hiring for this skill.

In tight times districts are also going to prioritize keeping people on staff. Many states (but not all) have specific money set aside for instructional materials and these funds will still be available. But, districts are always pressing for more flexibility in how they allocate funds – and where they have the ability to shift funds towards salaries they will.

The Federal level is a bright spot – particularly for technology. It is doubtful that we will see significant cuts for education at the Federal level. In the past Federal budgets have funded up to 50% of technology spending, despite being only 10% of overall education funding. See my note below on the candidates positions or read this post on McCain vs Obama on education. Obama is still proposing a $19 billion increase in Federal education spending.

Meta Trends a budget crisis plays into

Technology for efficiency

If you can show that your products save time and/or money because they make learning more efficient you can make a case to budget conscious administrators. You will have to make a clear and compelling case – there won’t be a lot of room for experimentation.

Since 70-80% of education spending is for staff anything that can improve productivity will help districts run lean. Products like GradeCam (client) which can save hours of teacher time while improving the feedback loop to students should thrive in this environment.

See this series of posts on technology substitution in the education market for more quantitative analysis on this topic.

Accountability mandates and standards focus on core subjects

Tough times will force decision makers to focus their resources on the core subjects of Reading, Math, and Science. They will still spend money on other subject areas but it will be tight.

That said – accountability is here to stay. NCLB is a balloon payment coming due in a few short years and schools will continue to invest in resources that keep them ahead of that curve.

Career & Technical education

The Perkins renewal in 2006 has brought a renewed focus on career education and a real shift in the priorities in this area over the past few years. In an economic slowdown policy makers will place a budget priority on this area – and the affects will be felt in both secondary and post-secondary institutions. If your products serve this market you should be OK – but only if you are in sync with the new career clusters and priorities.

New business models that shift the economics (freemium, sponsorships, etc)

There is a great deal of innovation going on with business models (see the panel discussion on this I moderated at AEP this year). Schools may be more receptive to advertising and sponsorship driven models in this economy than they might otherwise have been.

The Election

The outcome of the election will also have a significant impact on how the Federal Government responds to this crisis. The candidates have very different priorities for education. Obama is inclined to take the long view with regard to learning and is prioritizing Early Childhood Education and Lifelong Learning in his plans. Whether these priorities survive a brutal budgeting process next year is an open question, but you can make a pretty clear economic argument for investing in people in a recession. McCain places more emphasis on state control and privatization – but states are already deep in the throes of this crisis and he is not proposing any new spending on education.

This post is a starting point. If you have insights to add or disagreements with anything I’ve written here please respond in comments or submit a guest post. In the series on the economy and spending I did back in May Doug Stein and Charlene Blohm added a lot of value to the conversation with their guest posts.

Next up – who will thrive in a down market and who will struggle?