No Need to Bailout Districts with Declining Enrollment

In the 2015 movie The Big Short, Jared Vennett (played by Ryan Gosling) explained how the analysts who shorted the housing market figured out their play, “They saw it by doing something the rest of the suckers never thought to do: They looked.” In recent years, “everybody” has been very worried about enrollment declines in district public schools. Whether it is NBC News stating, “When more kids are leaving the public schools, that’s less funding for the public schools and those who are left, are left with less,” or the Brookings Institution predicting, “enrollment declines may threaten some schools’ financial and operational viability,”  pessimism abounds. 

My new EdChoice report, “The Enrollment Decline Windfall: Enrollment Declines Leave More Resources for Students Remaining in Public Schools” shows that “everybody” has it exactly backwards. That is, the system of education finance actually favors districts with declining enrollment, because these districts get to keep funding for students they no longer serve. 

How do all the experts have it backwards? 

First, when lamenting that districts lose money when they serve fewer students, the experts focus on a district’s total funding and not its per-pupil funding. The second is far more important than the first. The public school system of New York City has a much larger budget than that of De Soto, Kansas. It is unremarkable that the much larger district spends a lot more money than the very small district. What matters is how much a district can spend on each student.  

Second, enrollment declines in public schools are not new.  Even before the Covid-19 pandemic, a majority of public school districts were experiencing enrollment declines. Thus, we have a wealth of historical experience to analyze.  And, to my knowledge, no one has ever before looked to see if it is even true that enrollment declines leave students with less. 

With respect to the enrollment changes between academic years 2015 and 2019, total expenditures per student increased by 21.7% ($2,849) in districts with an enrollment decline. However, districts that saw an enrollment gain had only a 15.6% ($1,954) increase in total expenditures per student. Both of these increases were well above the Personal Consumption Expenditures (PCE) inflation rate (6.3%) over that time.

The data used in the report come from the U.S. Department of Education and the U.S. Census Bureau.  

Why could districts with declining enrollment increase their per-pupil total expenditures more than those with increasing enrollment? Because they saw larger increases in per-pupil revenue from all sources than those with enrollment gains. Local funding is often not automatically reduced when student enrollments decline. As homeowners know well, property taxes in most districts are not automatically reduced when enrollments decline. Further, some state funding is not directly tied to enrollment, and, in practice, federal funding is not proportionately reduced when enrollment decreases.  

Between 2015 to 2019, districts with declining enrollment had significantly larger gains in revenues from local, state, and federal governments than districts with gains in enrollment.  These patterns were consistently present over other time periods as well.  

Contrary to widely accepted wisdom, the school finance system actually favors districts with declining enrollment, because those districts get to keep funds for students they no longer serve. Put differently, when a district loses say 5% of its enrollment over some time period, that district loses less than 5% of its funding. This favorable funding system has allowed districts with declining enrollment to increase the financial resources spent on their students at a higher rate than the increases in resources available to students in growing public school districts. 

These larger increases in financial resources translated into larger increases in staffing per 100 students, larger compensation increases for public school employees, and other increases as well.  

The increase in compensation per employee was about double the increase in the cost of living (inflation), and all public school personnel are included in these averages—teachers, administrators, and all support personnel. 

Often state legislators and others are concerned with resource levels in rural public school districts. As shown in the report, each of the above patterns is also present for rural districts. That is, the public school finance system favors rural public school districts facing declining enrollments too.    

Specifically, rural districts with declining enrollment saw larger increases in per-student revenues from local, state, and federal sources, and these increases were two to three times the rate of inflation (6.3%) from 2015-2019. 

Given that past enrollment declines have led to more resources for students who remain in district public schools, it is reasonable to expect this pattern to continue.  

To see that there is no need for a bailout of districts with declining enrollment, all policymakers need to do is look.