With federal Elementary and Secondary School Emergency Relief (ESSER) funding winding down, the resilience of local educational agencies’ budgets will depend on how they generate revenue and on their reserves, according to a Moody’s report released on July 23.
Moody’s Ratings — a financial services company that provides insight on financial trends in education and other sectors — noted that public schools’ available operating funds peaked in fiscal year 2022, were flat in 2023, and are expected to remain flat or decline slightly in fiscal year 2024. By fiscal year 2025, balances are expected to drop while remaining above pre-pandemic levels.
LEAs will find themselves needing to cut programs to keep up, according to the report.
“K-12 school districts benefited from an exceptionally favorable operating environment over the past few years, but conditions are shifting,” the report states. “A substantial infusion of federal pandemic related aid for schools is ending. After years of expenditures coming in under budget as positions went unfilled, staffing costs are now accelerating and enrollment pressure is intensifying. Districts’ ability to respond will depend in large part on their willingness and ability to wind down programs funded with federal aid, the flexibility provided by their state operating environment and if they were able to add to reserves in recent years.”
In all but a handful of states, ESSER funding amounted to over 5 percent of annual education revenue, and in many states, it exceeded 10 percent. California came in at 8 percent. LEAs with the greatest need received the largest allotments and therefore, will face the greatest funding gaps as ESSER dollars runs out.
For these LEAs in particular, cutting programming they and their communities regard as important r to support student outcomes is likely to be a challenge.
Some of the K-12 programming funded with ESSER dollars will be particularly difficult to cut. The report found that among states reporting data, nearly half of ESSER III funding provided to schools was allocated to labor costs, including hiring teachers and support staff, lengthening the school day and providing salary increases.
While difficult to scale back, the report noted that the practical imperative to retain and attract staff was a significant driver of salary growth.
“Employment in the education sector recovered more slowly than the private sector after the pandemic with many schools experiencing substantial attrition and resignations,” researchers wrote in acknowledgement of the climate LEAs faced in recent years. “In addition to salary competitiveness, other factors made hiring tough, such as the difficult working conditions during the pandemic and the lack of a remote work option for most employees. The efforts to improve compensation and attract employees has worked, with public education employment exceeding pre-pandemic levels for the first time in June.”
Additional challenges moving forward include intensifying enrollment declines due to falling birthrates and other factors. According to the National Center of Education Statistics, K-12 enrollment is projected to decline by 5.5 percent in the decade leading up to 2031 the report states, but changes will be highly uneven across districts.
Several states have long instituted “hold harmless” provisions as a feature of their public K-12 funding formulas, and the pandemic saw these provisions spread, though some states implemented them only temporarily. Now, about half of the states have provisions that prevent or limit revenue declines from enrollment losses. Districts in states with longstanding hold harmless provisions will be least affected by declining enrollment, while districts with pandemic-specific provisions (like California) will see the greatest impact.
An LEA’s ability to respond to the tightening operating environment will depend on how they generate revenue, be it through state aid or local property taxes. In other cases, voter support for property tax renewals or increases will be an important variable, the report states.
Those districts that have amassed higher-than-historical reserves will have a longer offramp to respond to a tightening operating environment because “they can draw down some fund balance while maintaining their historical average and remaining in compliance with fund balance policies,” the report concludes. “While the overall trend of reserve growth has been strong, it is not even across the sector. Seven states have school districts with median reserves that are lower today than before the pandemic, and many states where median reserves are very similar to 2019 levels. Credit pressure is likely to be most significant in states where school reserves are both lower than peers and lower than they were in 2019.”
California is identified as a state that experienced a slight increase.
