DALLAS — In the heart of the oil-rich Permian Basin in West Texas, the sparsely populated Buena Vista Independent School District can barely afford to run its school buses.

Soaring diesel-fuel costs have threatened to curtail a bus route that connects the 979-square-mile district to neighboring Ector County, where 25 of the district's 135 students live.

"It's 55 miles one way, so that's 110 miles a day," business manager Marla Paulk said.

Officials recently purchased 1,500 gallons of diesel at $4.33 a gallon for six buses. That should last about a month, Paulk said.

The district is based in Imperial, which has a population of just 428. Despite the surrounding oil fields, local fuel costs are high.

"We're 30 miles from anyone or anything," Paulk said. "The further east you go, the better the prices."

Surging fuel prices aren't the only cause for concern for school administrators. Virtually every school district in Texas is dealing with rising costs, including higher construction costs for schools, rising food prices, and higher teacher salaries.

The Ector County Independent School District which includes Odessa-Permian High School of "Friday Night Lights" fame is enjoying an economic boom in oil even as the district struggles to make ends meet. Under state law, the district cannot retain additional revenue from rising property values. And soaring fuel prices in the vast district forced the school board to dip into its emergency fund earlier this year.

"We knew we weren't going to make it through the year," district spokesman Mike Adkins said. "Our costs were a lot higher than we estimated."

The irony that fuel costs have soared in Texas' richest oil basin isn't lost on area residents. "It's a constant source of discussion about how we can bring it out of the ground right here and pay so much to put it in our tanks," he said.

The district expects fuel costs to rise $600,000 or 60% higher than 2007's costs. "It's a stunning figure," Adkins said.

Another irony is that tax revenue generated by the oil boom is used to help fund the state's Permanent School Fund, which provides a triple-A rated guarantee for many school bond issues in Texas.

Districts such as Ector and Buena Vista, classified as property-rich under Texas' school-finance system, are chafing at the funding formulas that have been locked-in at a per-student spending limit. Buena Vista's wealth is virtually all underground, as household incomes rank far below the state average and the median home is worth less than $26,000.

In Ector, rising local tax revenues translate to a decrease in state funding, Adkins said.

"We're locked in at $4,500 per student," he said. "There are several districts that were locked in at $12,000 per student. I think there are a lot of districts that are going to be very angry when the Legislature comes back in session."

Texas House Speaker Tom Craddick, R-Midland, appointed a special legislative panel to explore school funding problems, which he expects to take high priority in next year's session.

Rep. Dan Branch, R-Dallas, who chairs the House Select Committee on Higher and Public Education, called inflation the top issue he has heard in a series of 14 hearings around the state.

"What we haven't had is an inflation adjustment," Branch said.

Districts are also complaining about their inability to increase revenue through rising property values, he added.

Rep. Lon Burnam, D-Fort Worth, echoed that sentiment, saying the school-funding debate and transportation issues will once again dominate the Texas Legislature when it convenes for its next session beginning in January. Burnam wants Texas to enact a personal income tax.

"We're way too dependent on property taxes when it comes to school funding," he said. "Texas needs a state income tax and it's something I've been pushing for the past few sessions. The bill I put forth would start an income tax on income in excess of $100,000 ... and this would provide for a one-third reduction in property taxes for the average middle-class family here in the state of Texas."

Burnam feels this also would provide the state with a better funding base to help school districts offset inflationary increases.

In the 2007 session, the Legislature created a new business tax under a Texas Supreme Court order to reduce school district's reliance on property taxes.

The new system allows school boards to raise their maintenance-and-operation tax rates by $0.04 cents per $100 of property valuation without voter approval. Officials can also call for an election for rate increases up to $0.13 cents per $100. Last year, 132 school districts called elections, and 107 succeeded.

School officials say they need the extra money to deal with high fuel prices and other inflationary pressure. Capping target revenue at 2006 levels unfairly hinders some districts, officials complain. And the state benefits from higher tax revenue while local districts are unable to retain additional revenues from higher property values, they say.

As costs escalate, school districts across the Lone Star state are taking steps to keep budgets for the coming year fully funded.

Last month, the Spring Branch Independent School District officials decided to tap reserves to fund a $10 million deficit for the coming year. The school board expects the district's current $58 million reserve fund to fall to negative $68 million in four years. Trustees bemoaned the state's school-funding formula saying it doesn't account properly for inflationary costs.

In November, voters in the suburban district just west of Houston approved a $597 million bond package to build two new elementary schools, buy 85 new buses, and replace 12 aging campuses.

In suburban Dallas, officials in the Carrollton-Farmers Branch Independent School District expect to seek voter approval for a tax increase to erase a $13 million deficit for the next school year.

Nearby Richardson Independent School District has begun charging students for bus rides and eliminating overnight trips to sporting events.

The Dallas Independent School District, facing a $17 million shortfall, expects its $20 million food bill to rise as much as 10% this year and will most likely pass that increase off on to students in the form of higher prices for milk and other products.

In El Paso Independent School District, officials are planning to lease new school buses that run on less costly propane as the district prepares for an estimated 10,000 students coming from the expanding Fort Bliss Army post.

"We're offering incentives to schools to reduce their energy costs," said chief business officer Ken Parker. "We're also holding overtime to a minimum, reducing part-time positions, improving attendance, and reducing custodial staff to 190 days instead of 270."

The Humble Independent School District, which won an upgrade from Standard & Poor's to AA-minus from A-plus ahead of a $97 million bond issue in April, had to dip into its $53 million reserve fund to cover a $7 million budget deficit this year and a projected $23 million deficit next year.

Despite the growing red ink, bond defaults are unlikely, officials say. No Texas school district has defaulted on a bond issue since the Great Depression.

Mal Fallon, managing director of Standard & Poor's office in Dallas, said underlying credits for school districts in Texas remain relatively strong despite tapping reserves to cover budget gaps.

"After all, that's what the reserves are there for," he said.

And most Texas school districts have sufficient reserves. Fallon also said transportation costs usually account for a small percentage of a school system's overall budget.

In the case of the Austin Independent School District, which was upgraded to AA-plus from AA by Standard & Poor's last week, transportation costs account for about 2.5% of the annual budget.

Still, investors are looking at issuers' underlying credits more and more due to all the turmoil in the bond insurance market over the past few months. And weakening balance sheets could put some pressure on the underlying ratings, especially for Texas schools as the Permanent School Fund nears capacity. The $56 billion program provides qualifying districts with triple-A ratings, precluding the need to acquire private bond insurance and lowering the costs of issuance.

Gov. Rick Perryand Education Commissioner Robert Scottare seeking to increase the PSF's bond-guarantee limit and the issue awaits a ruling from the Internal Revenue Service.

In Texas, enrollment is growing at the rate of 85,000 students, the equivalent of adding a school district the size of Fort Worth's each year, according to Rep. Branch. That puts increased pressure on the districts to serve the 4.6 million students as costs rise.

"Is the situation urgent? Yeah, I think it's fairly urgent because costs are rising so dramatically," he said.

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