Funding public schools based on enrollment in the previous year may help keep their budgets more stable, research shows

Funding for public K-12 schools in the U.S. is based on enrollment. More students mean more money. In 31 states, public schools use the previous year’s enrollment numbers^[1] to determine the current year’s funding, which makes it easier to soften the financial blow when enrollment declines. In the rest of the states, school funding is based on the current year’s enrollment – meaning that any change in attendance is immediately felt in the budget.

Some groups have criticized the prior-year funding approach^[2] – also known as the “hold harmless policy” or “funding protection” – as giving schools money for “ghost students,” calling it costly and unfair. Concerns like this may have prompted Arizona to switch funding^[3] models in 2017, giving public finance scholars like us a perfect opportunity to assess differences between how the two models can affect school budgets.

We analyzed data from 190 school districts in the state^[4] from 2011 to 2020, a period that includes six years before and three years after Arizona’s policy change. In each of the first three years after the state ended the funding protection policy, school districts with declining enrollment immediately received less state funding.

Our analysis shows that school districts have more stability when state funding is based on head counts from the previous year. When enrollment fell, we found that high-income districts were more likely than their low-income counterparts to cut spending on instruction and administration and reduce the number of teachers – especially educators with less experience. This was a short-term effect. We don’t know what happens over the long term.

We didn’t explore the reason, but we believe it’s because wealthier districts had more “fat” in their budgets in the first place that they could cut, while poorer ones were already pretty lean and trimmed where they could. It also seems that richer districts benefit more from a funding policy that relies on prior year’s enrollment figures.

Understanding the consequences of making this policy change is increasingly important as enrollment at America’s public schools is gradually declining. It’s projected to drop by 5% between 2022 and 2031^[5].

In addition, with the Trump administration’s plans to cut^[6] federal spending for K-12 public schools, more of the burden will be placed on states. Federal dollars account for about 10%^[7] or less of school funding. Reducing federal funding may prompt more schools to switch to funding formulas based on current-year enrollment.

References

1. ^{^} schools use the previous year’s enrollment numbers (doi.org)
2. ^{^} Some groups have criticized the prior-year funding approach (a8d50b36.rocketcdn.me)
3. ^{^} prompted Arizona to switch funding (www.azcentral.com)
4. ^{^} analyzed data from 190 school districts in the state (doi.org)
5. ^{^} projected to drop by 5% between 2022 and 2031 (nces.ed.gov)
6. ^{^} Trump administration’s plans to cut (www.edweek.org)
7. ^{^} Federal dollars account for about 10% (crsreports.congress.gov)