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Smith: Some Clues to What States Will Do When School COVID Funding Runs Out

While it will be a painful process, states need to acknowledge that school districts losing students should not get more funds to teach fewer kids

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Public schools are facing massive enrollment declines, with at least 19 states losing 3% or more of their students compared to pre-pandemic levels. New York’s 5.9% plunge is the biggest, and California isn’t too far behind at 4.4%. Because K-12 education funding is tied to student counts in most states, this trend will have major policy implications.          

Before the COVID-19 pandemic, public education spending was at record levels, averaging $15,656 per pupil in the 2018-19 school year and exceeding $20,000 per pupil in states such as New York, Connecticut and Pennsylvania. Education funding plummeted during the Great Recession of 2007 to 2009, but most states had replenished or exceeded their previous inflation-adjusted K-12 spending highs by 2019, thanks to strong economic growth and policymakers’ eagerness to boost funding as state budgets recovered.

At the onset of COVID-19, state lawmakers and school district leaders feared the years of balanced budgets were over, but, thankfully, most dire economic forecasts never materialized. In fact, stronger-than-expected state tax revenue plus $190 billion in federal K-12 relief have left many school districts with more dollars than they can spend. Per-pupil spending growth in states such as New Hampshire, Oklahoma and Texas surpassed 7% in 2020-21 even though the bulk of the federal relief funds remain unspent.

This influx of cash, combined with states’ hold-harmless policies that base school funding on prior year enrollment counts, have largely protected districts’ bottom lines in the face of declining enrollment. For instance, Houston Independent School District lost 12,759 students in 2020-21 — 6.1% of its enrollment — but its total revenue increased by 1.7%, while per-pupil spending jumped by $1,032. It was a similar story for Dallas Independent School District, which lost 5.64% of its students but still got $1,002 more per pupil.

But once federal relief funding expires in 2024, school districts will have to rely on state funding to plug budget holes caused by student losses and sustain long-term commitments made with the one-time funding, such as new hires and salary increases. The billion-dollar question is to what extent state policymakers will continue their hold-harmless policies once federal funding dries up.

Pre-pandemic trends offer clues of how this might play out across state capitals. 

Between 2016 and 2019, 30 states had enrollment losses, and eight of them — New Hampshire, Illinois, Mississippi, Vermont, Louisiana, West Virginia, Connecticut and Massachusetts — saw substantial declines of 2% or more. Of these states, only three (Mississippi, Louisiana and West Virginia) saw inflation-adjusted cuts in total education revenue, and all increased real per-pupil funding. Notably, Illinois’ enrollment fell by 3.9%, yet its total education budget increased by 8.4% with a $2,158 spike in per-pupil revenue.

Clearly, aggregate education spending doesn’t track neatly with enrollment declines. But revenue is only half of the school finance equation, and the fiscal fate of districts will also depend on how dollars are allocated through state formulas and related policies. Generally, districts lose state funding when enrollment declines, with prominent examples in the last decade including Los Angeles, Detroit and Baltimore. But pandemic policies have muddied this relationship.

For instance, in the past two years, Texas policymakers have overridden their student-based funding system with various hold-harmless policies that use outdated student counts to fund school districts. Illinois has also already committed to using pre-COVID enrollment counts for funding calculations through at least 2024. Despite having a relatively strong student-centered education funding formula that allocates dollars to schools based on real student needs, policymakers in California are now considering ways to weaken the link between funding and enrollment changes.

But these hold-harmless policies are expensive to maintain and divert resources away from students in districts with steady or increasing enrollment. After all, every dollar spent protecting districts from the fiscal effects of declining enrollment is a dollar not spent supporting students in the schools they attend. If states removed hold-harmless policies, these funds could be spread fairly among all schools, based on the actual number of students they are serving. 

While it will be a painful process, states need to acknowledge that school districts losing students should not get more funds to teach fewer kids. 

Districts that spend their one-time funding irresponsibly could face an unprecedented fiscal cliff when the money runs out and won’t be able to avoid layoffs, school closures and other cuts. Rather than wait and see, school districts should get their fiscal houses in order now, while they have flexibility in their budgets.

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