The Cost of Fuel Hits the Schools

Jane Sherman

Randy Dukek coordinates transportation for Independent School District 196, the largest district in Minnesota to operate entirely with its own fleet of buses rather than contracting for service. Students from Rosemount, Apple Valley, and Eagan will travel more than two and a half million miles this year, and each of the district's 200 vehicles will consume a gallon of diesel fuel for about every six miles it moves them along. So it's understandable that Dukek is freaking out a little about the huge recent spike in fuel prices.

"We budgeted for a 30 percent increase in fuel and we're hoping that is enough, but if these increases continue, we'll obviously have to adjust," he says. "A 30 percent increase is just under $200,000, or about 2 percent of our total transportation budget. And that would be an increase of about 70 cents per gallon over last year."

By last month, rising worldwide demand for fuel had already pushed the annual price increase slightly past the 70-cent threshold Dukek had set for his budget. But the fallout from last week's hurricane disaster in New Orleans, which indefinitely shut down refineries and pipelines vital to the nation's fuel supply chain, has tacked on another 30 cents per gallon, and threatens to wreak havoc with almost any and every budget.

Schools, however, which operate on a fixed income and are transportation-intensive, are especially vulnerable. As Dukek notes, "Once we've exceeded our transportation budget, the money has to come out of the district's general fund, which is used for classroom materials and everything else. It is a big concern."

Districts that contract out bus services are only marginally better off. The St. Paul Public Schools negotiates with private firms for about 95 percent of their huge transportation load--60,000 students traveling more than five million miles per year. David Peterson, the district's transportation analyst, thought he'd been extremely prudent, factoring in a fuel-price bump of more than $600,000, and a 3.6 percent increase in his overall transportation budget for this school year.

Even so, there is an escalator clause in the contract for "extraordinary price increases," that forces the district to pay more money to the bus company if fuel prices for the company reach $2.50 (which translates to about $2.82 at the retail level once bulk discounts are removed and taxes added). That threshold was breached last week, further burdening the school district, and no one can predict when it will go back down.

Furthermore, as Roseville Area Schools business manager Barbara Anderson points out, "It's not just our transportation costs we have to worry about." She cites reports that natural gas prices might increase 50 percent this year over last. "It cost us $575,000 to heat our buildings last year," Anderson notes. "If that goes up 50 percent, it is a significant cost. We also assume that there will be a sharp increase in the shipping costs for the supplies we buy."

Art Rolnick spent last week trying to mitigate the doom-and-gloom scenarios he was hearing over the economic fallout from Hurricane Katrina. The director of research for the Federal Reserve Bank in Minneapolis, Rolnick says that Katrina "won't come close to causing a recession nationally, and here in Minnesota, while there will be some pain, we shouldn't see much of an economic slowdown." Then came the caveat: "Now, this is assuming the problems with the refineries and pipelines and everything is three to four weeks rather than three to four months. If it is longer, I'd begin to hedge my bets."

Even with his sanguine scenario, Rolnick believes aggressive action may be necessary to bail out the schools. "Absolutely, if the schools are running into problems, I'd argue that special assessments should be considered at the state or local level, or maybe both," Rolnick says. "You'd think things like busing students and heating classrooms are necessities, and that's when assessments are required." (City Pages was unable to reach Gov. Tim Pawlenty, Senate Majority Leader Dean Johnson, or Speaker of the House Steve Sviggum in calls to their respective offices last week.)

The recent oil price shocks might not trigger a recession, but they are almost certain to exacerbate the inflation rate, which in turn would shake the state's budget. By 2002 law, state budgeting doesn't account for inflation when figuring the cost of services our government purchases. In other words, budget-expense forecasts, already disingenuously on the short side, are sure to fall further out of whack.

Last year, for example, the Minnesota Department of Finance felt obliged to amend its official projection of a $700 million deficit with the comment that the red ink would be twice as much if the inflation rate was a modest 1.8 percent in 2006 and 1.6 percent in 2007. Yet even before Katrina hit New Orleans, the company that the state's economists monitor to calculate inflation, Global Insight Inc., had raised its projected inflation rate for 2006 to more than 2 percent.

"The inherent problem of not having inflation in the budget [calculations] is that you are hiding costs," Rolnick says. "And that gap could certainly become wider now."

Sen. Richard Cohen (DFL-St. Paul), who authored legislation calling for inflation to again be considered in state budget projects, was less tactful. "We knew that if you don't budget for inflation it will catch up with you," Cohen recalls of the move that was made three years ago. "Three dollars a gallon for gas was not predictable, but rising costs were certainly predictable. We had an ostrich-buries-his-head-in-the-sand approach to the budget because we were trying to get through the session without admitting we had to raise taxes."

Within the next month or two, we will learn whether $3 a gallon for gas is a disaster-related blip or the new reality. But there really isn't any "good" news in this scenario, just degrees of economic pain. As Rolnick says, $3 a gallon may be temporary, but we will probably never fall below $2 again. In other words, public schools already feeling the pain may just as well get used to it.

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