How States and Public Schools Should Manage Revenue Declines

After looking back at the Great Recession of 2007-09 we found that while federal stimulus helped keep state budgets from feeling a pinch right away, budget challenges grew as federal stimulus ebbed. Since education is one of the biggest expenditures in every state, education funding took a hit – and it took years for school budgets to regain lost ground.

We also found that states delayed payments to schools, which burdened school finances. Most schools rely on monthly payments from their states to cover ongoing expenses. When those payments don’t arrive on time, schools are forced to draw down reserves or borrow against expected state payments, often at high cost.

These challenges are likely to reappear over the summer and into the fall, as many states begin their new fiscal years. In fact, the fallout from this year’s economic collapse has the potential to be even more daunting for state policymakers than the Great Recession was. In addition to the loss of revenue normally generated by sales, income, investment, and energy taxes, states are facing the prospect of major increases in spending on health care and jobless benefits.

While most public schools will have to contend with reduced funding, schools that receive a disproportionate amount of their revenue from the state – as opposed to local property taxes – may face steep and persistent revenue declines. This could be especially problematic for charter schools.

The average public charter school receives 64 percent of its revenue from state sources, compared to about 46 percent for traditional public schools. Charter schools are already at a funding disadvantage, receiving about 83 cents for every dollar in per pupil funding that traditional schools receive. And they often have to use a portion of this funding to pay for their buildings. Add in the fact that charter schools are more likely than traditional schools to be in urban areas, where the effects of the coronavirus pandemic appear to be more pronounced, and the fiscal challenge facing charter schools is clear.

What’s not yet clear is how much federal stimulus could help to alleviate state budget concerns. Washington has approved around $2.5 trillion in emergency spending through the CARES Act and other coronavirus legislation. But most of that money is being spent right now. Governors are already asking for help with expenses to come, and federal lawmakers seem receptive, but we don’t know how much help the federal government will ultimately provide. Even if substantial federal assistance materializes, states should still plan for when federal aid ends, to avoid having to make drastic and sudden budget adjustments.

When education funding cuts do have to be made, states should be cognizant of which schools and districts rely most heavily on state funding and apportion the cuts away from those schools. They should also prioritize making timely payments to schools, especially as schools face increased coronavirus-related costs. And states should ensure that school districts maintain their current revenue-sharing arrangements with charter schools, rather than forcing charter school students to bear a disproportionate share of budget cuts.

For their part, charter schools should begin preparing now for reduced state aid and leaner budgets. That begins with understanding the financial footing of their state and locality, including the size of the state’s rainy-day fund, the volatility of the state’s revenue stream, and how funding formulas may have differential effects on charter school budgets.

Charter schools should also be sure to access all the funding streams their students are entitled to, including federal child nutrition programs, Title I, and the Student Support and Academic Enrichment block grant (Title IV-A).

If at all possible, schools should start cutting costs and adding budget flexibility now. One benefit that most charter schools have in a crisis is that they can make budget and operational decisions independently of school districts. School leaders should closely examine expenses around support personnel, professional development, class size, course load, the length of the school day, and participation in state pension plans. These decisions may be difficult, but they need to be scoped out now rather than made with little planning or preparation in the future.

None of the budget forecasts for states and schools looks rosy at the moment. But by examining lessons from previous economic downturns, schools can at least begin to prepare for declines in state funding and do their best to cushion the blow for students and staff.