New report highlights volatility of education funding

A new report from the Public Policy Institute of California to aid local and state policymakers manage revenue shortfalls was released shortly before President Donald Trump’s Oct. 6 announcement to halt negotiations on a coronavirus relief package until after the Nov. 3 election. The President has gone back and forth on this position a number of times since.

While the administration’s decision creates a potentially devastating setback for local educational agencies throughout the country,  Funding California Schools When Budgets Fall Short finds that, while funding for the public school system is still volatile and that K–12 schools could face significant cuts if the California’s economy does not quickly recover, the state’s finances are stronger today than after the Great Recession a decade ago.

However, the report authors note that while the state was in a better position to keep schools funded prior to the pandemic than before the recession, LEAs this time around have drastically increased spending to keep children safe and almost exclusively learning from home.

“Under the current budget, California K–12 schools will avoid cuts this year. But continued economic struggles may lead to billions of dollars in future cuts to state education funding,” the report’s authors write. “Budget projections suggest large operating shortfalls in the next few years, although current tax collections came in above expectations in the past few months. Moreover, districts have incurred considerable new costs due to COVID-19 school closures and the move to distance learning since spring 2020, with more new costs to come in the 2020–21 school year to address the digital divide, improve distance learning, and reopen schools with improved safety, cleanliness and social distancing measures.”

Quick fixes and long-term solutions

As a result of the pandemic, concerns over lower state funding and higher expenditures to accommodate distance learning and school reopening plans, there is renewed attention on school reserves. In examining how district-held reserve funds are distributed, where cuts occurred in the recession and how prepared districts are now to manage revenue shortfalls in the future, researchers found that fiscal effects from the current crisis may impact high-need students and districts more, depending on policy choices.

While the 2020–21 budget avoids cuts to K–12 schools, current deferral policies burden districts with less property wealth that rely more on state funding, according to researchers. Future cuts — if done proportionally through the Local Control Funding Formula — would have a larger impact on funding in high-need districts, they said.

For the average school district, annual spending fell to over $2,000 less per student by 2012–13 as a result of the downturn. On a student level, though, total decreases over five years were roughly $500 more per student for low-income students, and cuts were larger for Latino and African American students than for white and Asian students, researchers found.

During the recession, California deferred $8.5 billion of K–12 school funding in 2010–13. When the state defers payments, districts must rely on their own reserves, on borrowing or on spending cuts to cover obligations until state payments are received. In the 2020–21 budget, legislators included deferrals of future payments so the state could continue K–12 funding at roughly the same level through this school year.

To help LEAs balance budgets, CSBA offers support through the California School Cash Reserve Program. The program, provided in partnership with Dale Scott & Company; Piper Sandler; and Orrick Herrington & Sutcliffe, creates an additional cash reserve to the general fund, helping guard against temporary cash flow shortages in a safe, cost-effective way. Participants issue Tax and Revenue Anticipation Notes (TRANs) through a streamlined, pooled process so that districts don’t have to shoulder the burden alone. LEAs that would like to be included in the February pool must apply by Nov. 20, 2020. (Learn more and apply here:

The report highlighted other fiscal strategies used during the recession, such as allowing more leeway in how LEAs allocated limited resources. The state gave districts the flexibility to transfer some categorical block grant funds to each district’s general fund to allow districts to target their direct classroom expenditures and essential student services.

Currently, district reserves are nearly twice as large as they were before the last recession, and those serving larger shares of low-income and Latino students appear to have the highest reserve levels. However, for most districts, researchers concluded that current levels still are not high enough to fully insure against large revenue drops.

“To build a school finance system that is stable and equitable when fiscal downturns lead to budget cuts, California must develop a more robust state K–12 reserve, help districts accumulate larger reserve funds, and prioritize student equity when balancing budgets,” according to the report. “State and local policymakers would be wise to consider a longer-term view of school finance policy and enact measures to maintain a secure funding system. Such a shift can ensure that a repeating cycle of dramatic education cuts does not become the long-term status quo.”