Budgeting for the Education Stimulus - How Much and When? — The Education Business Blog

NFImageImport At PCI we are putting the finishing touches on our 2010 budget. The Stimulus funds are creating a particular challenge as we look out over the next 12-24 months. On the one hand there should be plenty of new money in the market next year. On the other, despite ARRA an additional 9 states are sliding into California like crises as the housing slump begins to affect tax receipts.

There are two core questions companies need to answer as they think about priorities for the coming year.

Timing – when will the funds flow?
Volume – how much of the stimulus will be available for instructional materials?

1. When will stimulus dollars flow for instructional materials?

By December 11th 2009 less than 40.1% of the stimulus funds have been committed, and much less than that in some specific funds (e.g. Special Ed is only 12.3% spent). Since funds have to be obligated by this coming fall and spent by the fall of 2011 that probably signals a wave of orders in next summer’s buying season.

But wait! It has taken three years. but tax receipts are finally catching up to the housing slump. Since 34% of education funding comes from property taxes (Richard Sims, NEA) this is going to mean that moving forward more ARRA funds are going to supplant state funding. Depending on a particular state’s reliance on property taxes and how hard they have been hit by the Great Recession we will see a wide variety of state level differences.

[click to see a state level report of ARRA spending]

This affect is going to be felt broadly. Texas, which has not been hit particularly hard by the slump, is facing a shortfall and is planning budget cuts. Florida on the other hand is in full blown crisis mode (along with NJ, IL, WI, and several others). You will need to look at where your pockets of strength are to gauge the impact on your particular business.

We expect the spring to be tight – Superintendents will sit on any funds they have until they know their new allocations from the legislatures. Once this issue has been resolved the summer will be extremely busy.

% of Spending by Month

200912220816

For publishers this kind of curve presents a particular budgeting challenge. The investments you need to make in staffing, inventory, and marketing to maximize your returns during the summer need to be made during the spring when the outcome will be in doubt. It would be easy to bet wrong in either direction – either holding back and letting competitors reap more than their fair share or overspending and being left with your own ugly budget cuts in the waning months of the year.

2. How much of the stimulus will be spent on instructional materials?

If the curve above represents when the funds will flow what about the amplitude? Just how much growth will ARRA mean for Education Publishers? I’ve speculated before that about 4%-5% of the stimulus will be spent on instructional materials. Normally materials are about 1%-2% of education funding but because there are so many restrictions on how ARRA funds can be spent we expect a slightly higher amount to flow to materials. They are a relatively quick and non-controversial investment in most cases.

This would mean an incremental $4-$5 billion in the publishing and materials markets. Since the funding sources that will go for materials have the most money left the big bump is still ahead of us. Title 1 has 78% left, IDEA has 88% left, and Ed Tech has 98% left [link]. By contrast only 1% of the construction money is still available.

This will be spread over 2010 and 2011 but odds are that about 60% of the balance will be spent in 2010. Roughly, that could translate into an incremental $2.6 billion available to publishers this coming year. Wow.

The chart below presents an interesting view of a company doing $10m in revenues pre-stimulus. Note that in both scenarios (flat and up 20%) the revenues will be below a normal year through May. For the first four months to equal a normal year’s revenues annual sales would have to be up 50% over a normal year.

Revenue Projection by Month

200912220824

Education Publishers will have to be tracking their sales pipeline very closely to see what the summer is going to look like – otherwise you run the risk of making cuts or holding back on inventory that could hurt in the summer months. If you have not instituted one yet or if yours is lax – time to batten down the hatches there.

Conclusion

This is going to be a very unusual year in a market that is used to a high degree of predictability. Mileage by state will vary widely – so dig deep in your planning scenarios to project the impact in your areas of geographic strength.

Plan for the best, expect the worst, and watch all your leading indicators very closely.

Mark Espinola says:

December 23, 2009 at 12:38 pm

Dear Lee: I agree with your assessment that uncertainty will adversely affect instructional materials spending. I think we need to remember that schools, like households, vary spending on the margin. In the case of household budgets, we cut where we can in increments/on-the-margin (e.g., eating out, vacations), but we still need to make the house payment or pay for utilities. Schools are faced with the same situation. On-the-margin, schools are first paying for fixed building costs, then teacher salaries, then PD, and last new materials. In these uncertain times, administrators are seeing if there is anything left to spend on materials. I agree that we’re in for a difficult spring; however, I’m uncertain about the steepness of your curve in the summer months. I hope you’re right.

Doug Stein says:

December 28, 2009 at 10:46 pm

Hi Lee,
Here are some ideas for “digging deep” in your planning scenarios (incorporating Mark’s comment concerning schools cutting “on the margin”):
Signs you should discount the order volume for a territory:
1) The state hasn’t changed its standards since the last adoption (they might simply keep using the old books another couple of years)

2) The state doesn’t have categorical funding for its adoptions
3) It’s an open state (you’ll have to drill down district-by-district and see if your products address a critical need for that district)

4) Your product sales targets were predicated on a (canceled/deferred?) state initiative. For example, if you were planning on selling into 1-1 laptop initiatives check to see if they’re proceeding as planned. This goes for technology refreshes at the district level.

5) The territory contains CA (or any other state where the Governor has stated “no money for materials”). You might want to emulate Pearson and provide the FWO junk online.

Signs you might need to plan for a “consolation prize”:
1) Basal funds are tight/deleted, but there are crumbs left for consumables. You might need to aggressively plan to use a marketing push to refill/extend your “old” consumables an extra year, back off on the production of casebound texts, and pull back on your “feet on the street” in challenged territories.

2) Clients start channeling Wimpy (from the old Popeye cartoons) – “I’ll gladly pay you next year for a basal this year.” – in which case you might ask them to relax their NASTA rules for one year – and sell them very inexpensive consumable versions of the text. If they can pay you later you can ship casebound materials; if not you haven’t lost as much. In either case, you’ll have much better forecasts for casebound production runs.

3) Another riff on the financing approach is to deliver the “soft” (online) FWO materials (including online versions of the text). If you use a technology platgorm that prevents “scrape & print” you keep your customers aligned with your product (and away from your customers). You won’t recover your plant expenditures, but at least you won’t compound the expense by printing and warehousing a bunch of unsold materials.

Comments:
1) I think the tight years ahead will accelerate the changes in the industry from one-size-fits-all basals with multi-year development cycles to subscription offerings with multi-month development cycles. There’s simply too much risk in the present model. You can spend years sweating the arcane details of a state’s standards, carefully producing beautiful volumes, wheedling the state and district decision-makers – only to be denied at the last minute because of legislative horse-trading in a tight market. Unless you are prepared to play the lobbying game (and few companies have *that* much money), you’ll need a game-changing innovation. If you have neither lobbyists or disruptive innovations, you might want to wind down your operations in the “traditional” instructional materials market.