Making the Grade: The K-12 Funding Conundrum

by: Adam Newman | Blog |May 12th, 2020

One of the questions we hear most often talking to K-12 stakeholders these days is, “What will happen to K-12 budgets?” As you know, this one simple question masks an incredibly complex set of conditions and criteria that must be parsed to be able to answer it credibly at the federal level, let alone at a state or district level. And realistically, it is a thoughtful and rigorous answer to the state and district level variant that executives and school leaders are most interested in these days.

Today, we offer some preliminary thoughts as to how we might structure an approach to answering this question. And, we invite you to learn more about our efforts in this area and the opportunity to participate.

Thank you for your continued interest in our efforts. Please contact us to learn more about how we are tackling this knotty K-12 budget question.

Adam Newman, Founder and Managing Partner

Chris Curran, Founder and Managing Partner

Tanya Rosbash, Director

The K-12 funding conundrum

With the COVID-19 pandemic driving the American economy to a sudden halt over the past two months, catalyzing a recession and massive near-term unemployment, the impact on K-12 education funding stands to be significant. However, some states and districts are more vulnerable than others, a function of each state’s tax revenue infrastructure, level of federal government support, and response to the coronavirus outbreak. These three factors are further informed by more specific variables and considerations that further complicate a national – or even regional – picture of K-12 state and district funding dynamics.

Adding an additional layer of complexity to this picture is our upcoming national and state-level election cycle, which could make today’s policies and plans yesterday’s news. All this leaves districts, as well as their various suppliers and partners, struggling with a thorny multi-variate equation to which the answer is an achievable set of go-forward strategies for the 2020-21 academic year.

How will tax revenue receipts among states impact the magnitude and timing of district budget declines?

Although variable by state, 90% of K-12 education funding flows from state and local sources. Local funds stem predominantly from property taxes, which historically are more stable than state funding sources. Unfortunately, compared to the 2008 recession, districts today – on average – are more reliant on state funding streams, a particularly worrisome situation in our current climate.

The majority of state revenue is derived from income and sales taxes. Sales tax revenue typically serves to mitigate declines in other tax categories, as household spending usually persists at reasonable levels despite economic challenges that may impact other areas, including household income levels. However, the economic shock created by the pandemic has led to rapid, far-reaching shifts in consumer spending that threaten to severely impact K-12 funding in those states’ highly dependent on sales taxes revenue.

States heavily dependent on income tax revenue may experience more of a lagging impact, as collections this year are for individuals’ and corporate earnings generated last year (i.e., 2019). However, with unemployment surging to 14.7% in just two months, the lag is expected to be shorter than during the 2008 recession, where peak unemployment of 10% was reached in October 2009, two years after the start of the crisis. Importantly, states also experience variances in the volatility of revenues based on the industries that fuel the local economy. States have already started revising their projections and are signaling significant revenue shortfalls.

Historically, downturns in state and local tax receipts generally lag the changes in the broader economy by 2-3 quarters. However, given the dramatically abrupt nature of this crisis, we anticipate a narrower lag between the two, suggesting that the impact to K-12 education funding and districts’ budgets will arrive sooner than in previous downturns. Many districts are preparing for significant budget declines in the coming academic year, resulting in challenging scenarios for many K-12 suppliers.

To what extent is the federal government stepping in to provide support?

To date, federal stimulus funds from the CARES Act – distributed based on Title I allocations – will offset some of the declines to per-pupil spending. However, the initial stimulus is likely to fall short of estimated districts’ budget shortfalls. Without additional federal funds, Dr. Marguerite Roza, research professor at Georgetown University and Director of the Edunomics Lab, anticipates “anywhere between 5-20% impacts on state budgets, which could bring 1-8% impacts on districts.”

What does the path forward look like today?

As economists currently debate the expected shape of the recovery – whether it’s the “V,” “W,” “U,” “Nike Swoosh,” or another shapestates are looking to reopen. Differences in their responses will influence how state economies rebound, as will the intensity of future COVID outbreaks or “second waves”. For many parents, the reopening of schools is a condition that must precede a return to work. However, how and when schools reopen remains unclear. Nevertheless, states and districts have embarked on their processes to craft AY 2020-21 plans, ranging from a full return to school to ongoing remote learning environments.

Suppliers to the education ecosystem will need to stay closely connected to this complex mix of funding and customer dynamics. Across the next year, Tyton Partners will monitor and evaluate state and district-level funding trends for the 2020-21 and 2021-22 academic years and connect those to emerging district segments – or personae. The latter, derived via quantitative primary research with district leaders, will help answer questions about districts’ priorities, challenges, and available resources, among others. We anticipate conducting this research against notable time-based milestones, as a single “snapshot” view will not suffice.

If you are interested in learning more about participating in this initiative, contact Adam Newman to schedule time to speak.

Other K-12 reads from the past week

After a nearly year-long regulatory review process, publishing giants McGraw-Hill Education and Cengage have terminated their proposed merger

Well-known private schools have attracted criticism as they leverage small business stimulus loans despite sizeable endowments

Due to confusion over eligibility criteria, capacity at emergency childcare programs is not being fully utilized by essential workers and others in need

Mississippi is reducing minimum requirements for prospective K-12 teachers in anticipation of a projected teacher shortage

New York state has initiated plans to partner with the Bill & Melinda Gates Foundation on a plan to develop new online learning strategies

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