Inflation Will Put Districts in a Pickle

Minneapolis teachers went on strike, demanding a near-20-percent raise.

Talking with school district leaders in early March, I asked how they were thinking about today’s record-high inflation and its impacts on their systems’ finances. Turns out, most weren’t thinking about it at all.

On the one hand, that inattention was fair. At 90 percent of the budget, districts’ biggest expense is labor, which is frozen in place for the duration of the labor agreement. Any immediate inflationary impacts, like those of rising fuel costs, were impacting only a tiny portion of the budget (transportation costs amount to well under 5 percent of a district’s expenses). Some leaders noted that prices were rising for utilities, food service, and construction projects, but those things typically make up only a small slice of the pie.

Besides, districts are flush with federal relief funds right now.

Then I asked about upcoming labor negotiations and what they expected the ask would be from teachers and staff, given the skyrocketing inflation rate. That’s when I got their attention.

For most districts, the much larger inflationary wallop will come as districts adjust their salaries. Schooling is a notoriously labor-intensive industry. But still, most districts tend not to think about salaries until the current labor contract ends and the negotiating starts. And since teacher attrition is lower than attrition in other industries and tends to happen between school years, the effects of inflation only emerge as contract talks begin.

That time is imminent. Scanning the 44 larger districts that are members of the Edunomics Lab’s district finance network, which meets regularly about finance strategy, we found that more than half have contracts expiring this spring or are operating under an already-expired contract.

In the coming few weeks, teachers and other employees will be calling for sizable raises. They see that they are paying more for things like food, gas, and travel, and they want a raise so inflation doesn’t erode their purchasing power. And they see that other industries are moving quickly to hike salaries for their employees.

For some districts, it’s already happening. Minneapolis teachers went on strike amidst a demand for a near-20-percent raise. Teachers in Proviso, Illinois, walked out over demands for a 12.75-percent hike. Salary pressure is looking even more intense for lower-wage district employees, like aides, custodians, and food-service workers.

Federal relief funds are further complicating labor markets. It’s not just existing employees creating the salary pressure. In fact, the push to raise pay comes while many districts are deep into a hiring spree brought on by the mammoth infusion of temporary federal relief funds. With a use-it-or-lose-it spending deadline of September 2024, districts know they need to move quickly to spend down these funds, and many still have spots they haven’t filled.

With so many districts attempting to hire from a tight labor pool, the long list of unfilled positions is adding even more pressure to boost pay. Unemployment rates among college graduates are now at 2 percent, and for many districts, the only way to fill the federally funded open positions is to hire out from under the district next door with—wait for it—higher salaries.

This is where things will get tricky down the road. The compensation districts agree to in these inflationary times will tend to become permanent. A 5-percent raise gets enshrined in every cell on the traditional step-and-lane pay scale. It becomes the new baseline against which any future raises are awarded. This means that districts must accept the newer and higher cost structure going forward.

But how will a district with limited funds make ends meet when costs rise? Districts can’t pass off higher costs to the customer, as grocery stores do, or move quickly to lay off labor when the economy shrinks, as organizations in other industries do, because layoffs in education are politically difficult and enormously disruptive for students and staff alike.

Therein lies the problem: Locking in permanent pay increases now may exacerbate the financial ticking time bomb for districts.

Right now, districts are spending over $3 billion in federal relief funds per month, but that ends in 30 months. This fiscal cliff will financially destabilize any district unable to meet its ongoing commitments without relief funds. That includes any district using federal funds to pay for permanent raises or newly hired staff, or to backfill budget gaps (which is happening right now in Minneapolis, Seattle, and Houston). Making matters worse, some districts are facing dwindling student enrollment. Since enrollment tends to drive state aid, fewer students mean less funding.

With most state budgets flush with cash, district leaders may be optimistic that the finances will work out in the end. But those surpluses are the product of a booming economy, and economists are now warning that efforts to address high inflation will bring a corresponding slowing of economic growth. That slowing will affect state revenues, and ultimately districts, making it unlikely that new state money will blunt a district’s fall off the fiscal cliff.

What can districts do? District leaders aren’t powerless. They have options to balance the long-term cost structure while addressing the most pressing labor needs. They can start by acknowledging the raises already built into the steps and columns in the pay scale. These automatic features tend to bring an annual raise for each year of experience and additional increments for any graduate credits earned (generally amounting to 3 percent or more).

They can consider one-time, flat dollar raises instead of across-the-board percentage-based raises that disproportionately benefit the most senior staff. A 7-percent raise on a senior teacher’s $100,000 salary brings $7,000 in new pay. For a junior teacher making $50,000, the same 7-percent raise delivers only $3,500. Districts could propose, say, a $4,200 bonus; that represents 7 precent on an average salary of $60,000. Notably, employees perceive raises expressed in dollars as larger than the same raise communicated in percentage terms.

Districts can recognize that we’re not in a business-as-usual labor moment and, as such, target higher pay for staff in higher demand. In the wake of the pandemic and labor shortages, there seems to be a softening of traditional resistance to targeted pay. District leaders could contemplate floating bonuses to help hire staff in areas where they’ve had trouble filling positions and to hold on to staff in areas where they’ve had trouble with retention.

While they have money, districts can trade pay raises for corresponding cost reductions elsewhere in the budget to mitigate the net effects. These reductions could include adjustments to health, vision, dental, and retirement benefits, since most employees prefer pay over comparable spending on benefits. (While health-care costs have risen at a slower rate than other parts of the economy in the last year, forecasters expect those costs may rise soon.)

They can also make some pay increments non-pensionable—as the state of North Carolina did for stipends it awarded to all teachers this fall—otherwise a raise ultimately drives up pension obligations. Or they can ask for concessions on other costly items in the contract, like class size constraints, or requirements that each school have a specific complement of staff.

All financial decisions involve tradeoffs. Yes, inflation amps up the spending pressure on districts. But it’s up to districts to balance today’s inflation headlines with an eyes-wide-open approach to what lies ahead.

Otherwise, the financial disruption coming in a year or two will leave students in the lurch.

Marguerite Roza is research professor at Georgetown University and director of Edunomics Lab.

The post Inflation Will Put Districts in a Pickle appeared first on Education Next.

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