Making the Grade: The State of K-12 Funding – Is There Enough?

Last Wednesday, Joe Biden was sworn in as our 46th President. Discussions immediately centered on what the new administration would do to carry the nation to the other side of the crisis. His response was swift: a massive $1.9 trillion proposal that highlights direct aid to American institutions – among those, K-12 education, which has been allotted $130 billion.

Still, these figures are just headlines. While they are encouraging in scope and urgency, the Biden proposal must navigate a fractured Congress. As businesses navigate the spring selling season, we encourage you to push past the headlines to consider what we definitively know about the state of K-12 funding. To that end, we have outlined our current perspective on a set of key questions related to current and future dynamics.

If you would like to raise a question or simply explore these topics further, we welcome the opportunity to speak with you.

The State of K-12 Funding – Is There Enough?

How much federal funding is required to stabilize K-12 education?

Note: Fiscal Year (FY) is based on a July 1^st start. FY2021 equates to academic year 2020-21 (“this year”) and FY2022 is academic year 2021-2022 (“next year”).

Since the outbreak of the pandemic, budget shortfalls have plagued K-12. For months, politicians, administrators, teachers, and families have been calling on the federal government to provide more funding for states and, by extension, K-12. At Tyton, we have undertaken detailed efforts to square historical funding data with state-specific dynamics and expert insights to make sense of the K-12 funding dynamics.

Notwithstanding the complexities of K-12 state funding mechanisms and formulas, the logic behind the funding challenge for many districts is straightforward:

• Source Funding: Roughly half of national K-12 education funding comes from state budgets, which are supported by revenues comprised primarily of income and sales taxes. Another 45% of national K-12 funding stems from local sources, driven largely by (generally) stable property taxes. The remaining balance is derived from federal programs, the largest of which are Title I and IDEA.
• Trends: Over time, this allocation has shifted, with state funds increasing in large measure to ensure more equitable distribution across districts and students. However, state funding is particularly susceptible to economic downturns, which is where most states find themselves today; this dynamic creates duress and uncertainty for many K-12 districts. Federal stimulus programs thus function as a lifeline to states facing budget shortfalls, and those programs which depend on some level of state support.
• Implication: In the current environment, states are relying on federal stimulus to stabilize declining revenue inflows. Tyton forecasts state funding will decline sharply in FY21 and FY22 – far beyond levels experienced in the Great Recession – so the need for federal intervention will be greater than ever before.

So how much funding does the K-12 sector need to overcome the deficit?  During the Great Recession, state funding declined 2% in 2009 and 6% in 2010, warranting $80 billion in federal stimulus funding that worked to stabilize the sector over a three-year span. Today, if we had no funding from federal stimulus to-date, we estimate there would have been a state budget decline of 5% (-$17B) in FY21 and 13% (-$44B) in FY22. Our analysis indicates total K-12 funding would have declined by ~$4 billion in FY21 and ~$27 billion in FY22 – the equivalent of more than $500 per student. This suggests that the aggregate federal stimulus, inclusive of what has been provided to-date, will need to considerably exceed what was made available through the American Recovery and Reinvestment Act (ARRA) in 2009 to adequately support K-12 districts.

How does the path forward vary by state?

The funding declines are not felt consistently across the country – state and local dynamics vary, so context plays a vital role in forecasting K-12 budgets. Our team has created a state-by-state forecast based on state budget deficits, local funding formulas, and federal stimulus scenarios. The outlook for any given state is based on several factors, including:

• Tax structure: States that are most reliant on sales tax revenue are most susceptible to sharp downturns, as are those that rely on industries such as oil, gaming, and tourism to sell goods and services.
• Reserves: Not only does the taxing formula highlight the severity of potential revenue loss, but so too will the amount of money states have placed in their rainy-day funds. For example, Michigan was able to plug a $2.2 billion deficit in FY20 in large part due to its $1.2 billion reserve; however, the state now faces a $3 billion shortfall in the current fiscal year, with little left in its reserve.
• Political actors: Individual state actors (e.g., governors, legislative leaders) have significant influence on budget priorities and allocation of scarce (or excess) funds. The political motivations, election cycle dynamics, and party affiliations of these individuals all play into spending policy decisions and impact availability of K-12 resources.

These funding dynamics reveal that some states will fare better than others. For example, California – home to nearly six million students – is facing some of the nation’s most severe shortfalls in FY21-22. As such, the state is planning to defer $12 billion in K-12 district payments barring federal relief. Meanwhile, we expect a far more stable – and in some cases positive – outlook in states such as Pennsylvania and Alabama, where budgets have proven more resilient due to relatively consistent tax revenue and available rainy-day funds.

What has been the cumulative impact of stimulus funds already passed? Have they been “enough” to bolster K-12 budgets?

In response to the anticipated sharp decline in state budgets, the Federal government passed two relief packages directly allocating nearly $70 billion to the K-12 ecosystem. The CARES ACT was signed into law in March 2020 and provided ~$15 billion* in emergency relief; the Consolidated Appropriations Act (CAA), signed in December 2020, makes ~$54.3 billion available to K-12 through September 2022 and includes an additional $2.7 billion for private schools.

The impact of this stimulus funding on K-12 district budgets, spending, and student outcomes needs to be tracked across states and districts over the next two years; we estimate that overall, the stimulus funds will have a net positive impact on K-12 funding in FY21 relative to the prior year, driving up national totals by ~$23 billion, or three (3) percent.

However, without additional funding, these two relief packages will not be enough to keep FY22 funding at similar levels as FY21. We project there could be another steep “cliff” – this time more than $30 billion – should there fail to be additional relief. The Biden administration’s current request implies that the Federal government will step in with additional relief, but until that plan works through the challenging legislative process, questions will remain for K-12 district leaders regarding the resilience of their district budgets beyond this year. In a late 2020 Tyton Partners national survey of K-12 district leaders prior to Biden’s proposal, two-thirds of district leaders reported anticipating budget declines for the next academic year (i.e., FY22).

Proposed 2021 stimulus initiatives and other funding issues we’re watching closely

The new administration’s proposed stimulus is significant in scope. As it stands, the package allocates $130 billion to K-12 – nearly 2x what has been provided since the outbreak of COVID-19 and 1.6x what was made available through ARRA. As noted above, the package still needs to filter through the House and Senate, though, and early signs of the negotiation are emerging.

We are not going to speculate on the bill’s legislative promise; what we can do, however, is look ahead and consider how the K-12 funding landscape might change should a bill of this magnitude pass. Here are several issues we are watching closely:

• There will certainly be funding restrictions tied to health and safety – this is in lockstep with Biden’s promise to safely reopen schools and reflects how stimulus funding has been deployed in the early days of the pandemic. In our national survey we found that the health and safety category (e.g., cleaning supplies, personal protective equipment, physical barriers) has been the most common area of stimulus spending, followed closely by technology infrastructure (e.g., hardware, devices, internet access).
• While the previous two stimulus packages enabled a broad range of allowable uses of funds, we expect more restrictions in this new package. A sizable portion of funding is likely be tied to combatting learning loss. How specific these designations will be remains an open issue and could have significant implications for K-12 suppliers. Our research reveals that district leaders are already anticipating a pronounced shift in focus from pandemic management in FY21 to academic intervention in FY22, regardless of any new funding that may be available.
• We anticipate schools and districts will turn to their partners for solutions that can meet the present circumstance. In particular, solutions geared towards closing core academic skills gaps will receive considerable attention, as will solutions effectively and intuitively supporting teachers’ efforts to differentiate instruction to account for learning gaps.
• Biden’s platform includes a tripling of Title I funding. While an adjustment of this magnitude will face an uphill legislative battle – and stimulus is the immediate short-term priority – Title I tends to be viewed positively on both sides of the aisle. Expanding Title I would not only be a significant education reform, but potentially a strategy to smooth the “cliff” after stimulus funds run out in future years.
• We know the story for suppliers will play out differently at the state and district level, regardless of the above considerations. We continue to do detailed forecasting to examine funding profiles of each state under various scenarios. If you are interested in learning more, reach out and schedule time to talk with members of our team.

The Bottom Line

Despite a number of open questions, the K-12 sector is on the cusp of what could be an unprecedented stimulus. Funding on its own will not solve all the challenges wrought by the pandemic and the crisis fatigue facing many schools and their leaders and teachers. It will, however, ensure dollars are available in the system to navigate the transition back to classrooms, focus on learning gaps and equity challenges, and in some communities, support  a reimagining of school models.

*The CARES Act made $13.2 billion available to K-12 via the Elementary and Secondary School Emergency Relief (ESSER) Fund. Another $3 billion was made available as part of the Governor’s Emergency Education relief (GEER) fund, where distribution of funds across K-12 and higher education was at the discretion of each governor. While the amount of GEER funding allocated to K-12 education varies by state; on average, Tyton’s research suggests that governors dedicated ~60% of total funds ($1.8B) to K-12.