On Wednesday, the Board of Commissioners of Public Lands provided the West Allis School District with nearly $15 million in energy efficiency and general loans. The West Allis School District has been characterized by a number of questionable financial practices in recent years. Since at least 2007, the school district engaged in overspending, poor budgeting, and regular drawdowns of its reserve funds. By last summer, the district had completely eliminated a $17.5 million reserve fund and built up a $2.1 million deficit.
West Allis taxpayers, perhaps cognizant of the school district’s history of waste, rejected a $12.5 million referendum that would have raised their taxes substantially last spring. But rather than make adjustments to spending to overcome the budget shortfall, the district sought out additional funding, primarily through $12.8 million in energy efficiency loans.
Exactly when the need to raise funds for energy efficiency arose is unclear. The referendum rejected in April was described as “an operational referendum to cover rising costs of expenses, retention of staff, and develop new programs.” There was nothing about energy efficiency. But there are at least three key takeaways from this debacle.
1. A complete loss of local control.
The school referenda system in Wisconsin, while arguably abused in some circumstances, is designed to give local taxpayers the final say on whether they will pay more for their local schools. The wisdom in this system is that those ‘on the ground’ have the greatest connection to what is going on in their schools and have a better feel for whether there is a need to hire additional teachers or make capital improvements than a legislator in Madison.
Such referenda are passed by taxpayers more often than not. In the April election, 40 of 65 (62 percent) of referenda passed throughout the state. When taxpayers reject higher spending, they probably have a good reason. By seeking to raise taxes outside of the referenda process, the West Allis School District effectively did an end-around of the interests of West Allis voters.
2. The Problem of the Moral Hazard: Should the State Bail out a School District?
Like the bailouts of financial institutions during the Great Recession, the provision of additional funds to West Allis outside of the referenda process could represent a slippery slope whereby school districts learn that there is little accountability for their use of taxpayer money. This is what is known in economics as a moral hazard—the idea that absolving someone of the penalty for profligacy will result in higher levels of profligacy. If Energy Efficiency grants can be used to make up deficits, the incentive for school districts to avoid running deficits is necessarily reduced.
3. Public schools are less accountable than choice schools.
It is worth noting that such a moral hazard could not exist in the ostensibly “unaccountable” private school choice sector. As highlighted in a recent study by WILL and School Choice Wisconsin, these schools are subject to regular audits and financial reporting requirements that prevent schools with poor financial records from entering the program and force them out. Schools that were failing financially would certainly not receive a government bailout if they came up millions short, and they would certainly be removed from the choice program.
But for public school districts, what can be done to remedy this problem? The elimination of the energy efficiency grant might go a long way in accomplishing this. Since the law’s enactment in 2009, school districts have used it to raise more than $217 million on the backs of local taxpayers without getting their approval. By removing this loophole in local control, districts like West Allis will be forced to prove to taxpayers that they are being good stewards of their hard-earned money before asking for more.