01/24/2011 08:42 am ET | Updated May 25, 2011

Three Strategies for Broke States

It's a tough time to be a state legislator. I spent Saturday morning listening to Washington State House Education Committee testimony from school board members, teachers, principals, and parents of kids in special program all speaking against budget cuts. No one in the room seemed to understand that everything is different this time.

Money manager Whitney Tilson suggests that the fiscal crisis "means that the 100+ year bull market in education funding is likely over." Over the last thirty years, we doubled staffing ratios, added generous pensions, and greased the wheels of reform with lots of extra spending--that is over. The ARRA stimulus will be noted as the zenith of education funding (and federal control in education); states are broke, the cliff is here.

The Center for Budget and Policy Priorities outlines the problem:

As governors across the country prepare their budget proposals for the coming year, they continue to face a daunting fiscal challenge. The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. State tax collections, adjusted for inflation, are now 12 percent below pre-recession levels,[1] while the need for state-funded services has not declined. As a result, even after making very deep spending cuts over the last several years, states continue to face large budget gaps.

To date some 44 states and the District of Columbia are projecting budget shortfalls for fiscal year 2012, which begins July 1, 2011 in most states. These come on top of the large shortfalls that states closed in fiscal years 2009 through 2011. States will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs.

The average shortfall is 20%, with some states like Nevada over 40% short of being able to pay the bills. A state survey suggests that 2012 will be the most difficult budget year on record, with budget shortfalls exceeding $125 billion.

The budget cuts will be huge in most state for several years to come, but it actually gets worse when you consider the swelling pension tsunami and the $18 trillion of hard debt not on the books.. Education will be crowded out by Medicaid, corrections, and emergency spending on deferred infrastructure.

You get the picture--it's awful, it's different, it's the "new normal." So what is a governor or state legislator to do? Each state is unique and will need to build their own list of budget cuts, but there are three directional strategies that state policy makers will need to incorporate during this decade long inflection. State policy makers need to lead on school based budgeting, blended learning, and performance-based employment.

America's anachronistic history of local control makes it difficult for state leaders to orchestrate cost savings other than across the board cuts. However, states have quietly taken control of standards, assessments, data, and increasingly school finance. This trend should accelerate with weighted student funding (i.e., harder to educate students get more money) and school based budgeting. Reducing school district budget control--the way the UK limited the role of Local Education Authorities--and pushing money directly to schools could save $50 billion a year but will require constitutional change in some states.

To absorb 20% cuts and boost outcomes, schools will need to incorporate personal digital learning. By blending online and onsite learning, schools can save money and boost academic outcomes. Digital Learning Now outlines 10 recommendations for state policy makers. It's not coincidental that Dwight Jones is simultaneously taking over Nevada's largest school district and joining the board of the International Association for K-12 Online Learning (where I am also a director).

American education will slowly adopt a new employment bargain that includes differentiated and distributed roles, higher pay for more responsibility and better performance, and more front loaded opportunity with less focus on pensions.

We can't solve this education fiscal crisis the old way--it is much larger and will last much longer; it is the start of a new era, not a storm to be weathered. We can actually accelerate academic progress through this crisis if state leaders have the courage to restructure governance, schools, and compensation.