From surplus to scarcity: Is it time to sound the alarm on district finances?

Public K-12 districts are fast approaching the end of the influx of federal funding that helped many through the COVID-19 pandemic, leaving them to face both familiar and new economic constraints without that safety net.

As administrators grapple with declining enrollment, trying to continue programs they implemented during the pandemic and the challenge of inflation, a commitment to long-term financial planning, based on varied funding scenarios, may be in order.

Districts have until the end of 2024 to commit the remaining funds, which must be spent by 2026. Looming in the coming years are major challenges that most administrators are familiar with—though their confluence presents amplified risk and will require diligent planning to manage:

Decreasing enrollment                                                                 

Declining enrollment in public school districts emerged as a head wind ahead of the pandemic and accelerated as COVID-19 unfolded, putting at risk funding that is tied to headcount. In the absence of COVID-19 relief packages like the Elementary and Secondary School Emergency Relief Fund (ESSER), expenditures would likely have decreased in lockstep with enrollment. However, the influx of ESSER dollars allowed schools to instead increase expenditures while headcount fell. For example, Los Angeles Unified School District (LAUSD) enrollment declined by 3% annually while expenditures grew 11% annually from School Year (SY) 2019 to SY 2022 (Figure 1).

This trend is evident across the country and in many other major districts. As shown in Figure 2, Miami, Chicago, Houston and New York City represent additional examples of declining enrollments alongside rising expenditures, creating increases in per pupil spend that are likely unsustainable long term.  

Declining enrollment is not just a pandemic phenomenon and is expected to continue. While some families that moved to virtual or private schools around the time of the pandemic may eventually return to the public system, the larger structural shift of declining birthrates will likely impact public K-12 enrollment for years to come. As a result, current elevated spending could soon exceed allocated revenues if not brought into check.

Loss of ESSER funds for recurring student support

While initial uses of ESSER relief funds skewed toward the purchase of personal protective equipment and upgraded health and safety infrastructure, a substantial portion of ESSER dollars are now being spent on recurring student support programs to combat pandemic-related learning loss. Experts at FutureEd, a nonprofit think tank at Georgetown University, have estimated that over 40% of districts nationwide have committed ESSER dollars to tutoring and academic coaching programs. According to Burbio, an organization that aggregates school-level data, local education agencies (LEAs) plan to spend roughly 60% of American Rescue Plan (ARP) ESSER funding on categories likely to represent recurring commitments such as academic intervention, mental health support, and teacher staffing and retention, totaling nearly $60b in expenditures (Figure 3).

Student, teacher and parent demands for these types of services are expected to persist even as stimulus funds expire. In Texas, schools used about one-third of ESSER funds to support student needs, and the state anticipates this figure will continue to increase (to almost half for the remaining funds) as districts tackle learning loss and mental health challenges. Investments have been made in high-dosage tutoring, high-quality instructional materials, job-embedded professional learning, extending the school day and year and summer learning programs. All of these investments represent essential supports that have become embedded in day-to-day operations: without a clear plan to make these programs sustainable within typical operating revenues, overall budget viability could be in jeopardy.

Inflationary pressure

Inflation has put increased pressure on all sectors of the US economy, driving up the costs of compensating employees, operating facilities and purchasing transportation services. While overall inflation has reached almost 7% over the past two years, growth in prices for utilities and transportation has been even higher, directly impacting school district operations (Figure 4).

Even as teacher stress and working hours have increased, teacher wages have not kept up with inflation, and governors on both sides of the aisle have made increasing teacher salaries a key political priority. For example, in Arkansas, new Gov. Sarah Huckabee Sanders announced an initiative that would bump starting salaries for Arkansas teachers from $36,000 to $50,000, a significant increase that moves the state from 48th to fourth in the nation for minimum teacher compensation. The plan also potentially introduces merit pay bonuses of up to $10,000 annually and provides 12 weeks of paid maternity leave. While these plans make K-12 education a key political priority, they also add budgetary pressure as financial dynamics shift.

Recent state budget proposals suggest some relief for K-12 finance, though extent is uncertain

To be sure, several states find themselves in healthy fiscal positions due to strong revenue growth, facilitated in part by increased tax collection as businesses rebound from the pandemic. Many governors across the political spectrum plan to use surpluses to increase allocations to K-12 education.

However, as many of these proposals have not yet passed, the timing, magnitude and extent of benefits to K-12 budgets is unclear, especially as states weigh several competing priorities in allocating additional dollars. What’s more, while some states have seen healthy budget surpluses, other states (such as California and Alaska) have found themselves in deficits or have called for overall budget decreases.

Looking ahead, the National Association of State Budget Officers acknowledges that budget projections for fiscal year 2024 remain conservative in most states as planners forecast slower revenue growth, suggesting that any boosts to K-12 budgets may be fleeting.

Districts need strong multiyear financial planning to successfully navigate shifting dynamics

Given ongoing and impending financial challenges, how can districts chart sustainable courses forward? The answer lies in long-term financial and scenario planning. While many districts have annual budgeting processes, fewer have up-to-date multiyear financial plans that project revenues and expenses by funding source under various scenarios. Annual budgeting approaches work best when factors in a system — namely enrollment, revenues and costs — are relatively stable year to year. In today’s environment, with systems facing sizable shifts in budget determinants with the transition out of pandemic and into a potential economic downturn, long-term planning is critical for fiscal responsibility.

The essentials of long-term financial planning are:

1. Sizing the current operating surplus or deficit: To gain an understanding of their financial position, districts need to first understand if they are operating in a surplus or a deficit. Districts should pay careful attention to the recurring elements of their revenues and expenses in assessing their operating position, as one-time items often mask the full underlying financial picture.
2. Forecasting trends: Effective forecasts incorporate scenario analyses (for both revenues and expenses), making careful note of the reality of declining enrollment. Enrollment-related revenue declines can be outsized compared to associated declines in costs: only some costs are truly variable with enrollment (textbooks, supplies) while many others are fixed or semifixed (facilities, maintenance, utilities, much of labor). Declining revenue scenarios paired with flat to slow growth in expenditures can create deficit positions for districts.
3. Problem-solving: Tackling deficits and building a long-term position of strength require thoughtful strategic planning. Now more than ever, it is important for districts to proactively consider strategic priorities and marry objectives with financial fundamentals, rather than reactively respond to emerging deficits and declines. While the latter can lead to years of playing “catch-up,” the former can support transformative efforts to enhance student outcomes and experiences.

In the coming months and years, EY-Parthenon team plans to monitor the status of K-12 district finances amid persistent economic and enrollment challenges and will continue to support districts in their long-term financial planning efforts. If your state or district wants to learn more about the strategic planning support EY-Parthenon team provides, please reach out to me or the EY-Parthenon Education team.

The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.