The Keystone State’s Keys to Fiscal Responsibility
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I had the privilege recently to sit in on a presentation of key points to the Pennsylvania state budget by the secretary of the revenue. The presentation was made to local business and community leaders to educate them as to the facts that necessitated the budget being drafted as it was now being presented. I’ll save the soapbox for the sidewalk preacher and instead I’ll run you through the two major trends that investors in all states really need to pay attention too.
Energy
Having now sat in on a hand full of briefings by the governor’s office, the biggest topic of discussion continues to be on getting energy right. Specifically, to Pennsylvania, it is relating to responsible gas drilling that provides jobs and economic growth while protecting our environment. While “fracking” is not without its detractors, politicians see this as game changer for our economy.
In Secretary Meuser’s presentation he pointed to the hard-fought battle to bring the Royal Dutch Shell (NYSE: RDS-A) “Cracker” plant to Pennsylvania as they beat out several other states for what will be the biggest single investment ever in the state. While the plant will one day create 10,000 construction jobs and about 1,500 direct jobs, it’s the follow-on effect that has the potential to return in multiples. What they really see is the potential for manufacturing coming back to the US in droves thanks to inexpensive feedstock from shale gas.
A further interesting note was his mention of Delta Air Lines (NYSE: DAL) buying a refinery near Philadelphia from Phillips 66 (NYSE: PSX). In the deal with Delta the state gave them $30 million in assistance, which helped to seal the deal and keep and create jobs. Investors need to be aware that some states' efforts to ensure their future are tied to the long-term economics of energy. Specifically, they are willing to make financial concessions to ensure projects have the required economic returns demanded by the private investors.
Education
The second trend that was quite obvious was on education, specifically relating to charter and cyber-schools, but funding of higher education was not left out of the discussion. Having a local school district superintendent in the audience certainly helped jumpstart the discussion, but there are very personal and deep-seeded emotions tied to this topic.
The revenue secretary made it clear that the state was going to continue to fund charter schools like those run by K12 (NYSE: LRN) unless they proved to be unsuccessful. Many statistics were rattled off by both sides of the argument, but the key point that was loud and clear: charter and cyber-schools had to vastly outperform traditional schools or they wouldn’t be around for long.
I must be honest with you -- the numbers spent on education through all levels is astonishing when you see them, especially if you look at them and hope to see an improving return. For example, since 1995 education funding in the Commonwealth has doubled from $13 billion to $26.5 billion and the number of teachers has grown from 113,000 in 2000 to 127,000 in 2010. However, student enrollment has fallen from 1.86 million in 2000 to 1.78 million today. So, we are spending more money on fewer kids while improving the student to teacher ratio but the results have been less than desired. There are many other factors driving these numbers, such as pensions, but it’s a lot of money by any measure. So again, they are looking to new and innovative solutions such as those provided by K12, but given the emotions involved the leash would seem to be very short.
A final point he made was relating to funding cuts to state universities. I’m sure we all know about the problems with student loans and the burdens they are leaving on graduates. The dollars invested by state governments in universities is starting to reach its breaking point. Universities are facing new profit-motivated rivals such as Bridgepoint Education (NYSE: BPI) who are working to upset the apple cart. Without having to expend a large amount of funding on capital projects as their brick and mortar peers, these online universities are making millions of dollars in profits for their investors. Again, the outcomes are coming under heavy fire and Bridgepoint and their peers need to put student outcomes first for investors to see returns not driven by the headlines.
Key Takeaway
Charter and cyber-schools are a hot button issue and K12 is right in the crosshairs. They have an enormous untapped market if they can perform as advertised, though, they likely will need to perform well above those levels.
Speaking of advertising, that was one of the biggest criticisms leveled against the local charter schools. Many were quite passionate that those dollars should have been spend on educating students and not billboards. Needless to say, headline risks will remain for a long time as they will continually be under the microscope. If nothing else I think we all hope that their existence might push public schools to operate more efficiently to produce better outcomes for the students. All that being said, I believe we as a country do have our best days still ahead of us. We have unbelievable untapped energy potential that, when combined with our potential in education, leave us with no rival.
latimerburned owns shares of K12, Phillips 66 and has written puts on Bridgepoint Education. The Motley Fool owns shares of Bridgepoint Education. Motley Fool newsletter services recommend K12. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
