Tax revenue in states outperformed their pre-pandemic growth trajectory in most states. That’s good; right? Maybe. Consider that annual revenue growth rates continue to slow and is on track for negative growth by the close of FY23 and into FY24 when Elementary and Secondary School Emergency Relief Fund (ESSER) funding will all but dry up.
The cut-off from COVID-19 federal investments and weak economy are creating a perfect storm for shortfall in state and local public education agencies1.
Many states experienced tax revenue gains for the second year in a row in fiscal 2022, but annual growth rates cooled when compared with the record pace set in the previous fiscal year. What feels like a surplus now will feel very different as slow growth intersects with the end of federal budget subsidies. The National Association of State Budget Officers (NASBO) reports rainy day fund balances continued to grow in fiscal 2022 after increasing 58% in fiscal 2021, and the median balance as a share of general fund spending is projected to be 12% in fiscal 2023.
The rainy day for most states may be upon us as NASBO is also anticipating a 3.1% annual decline in general fund revenue amid weakening economic conditions. This decline will hit the coffers of local school districts and schools hard in FY25.
School funding is a blend of federal, state, and local dollars. Local funding largely comes from property taxes. Formula federal money typically targets low-income students or other distinct groups and has steep compliance requirements that will reactivate once ESSER ends. State funding is where things get complicated, and states will need to get thrifty.
What should school districts do?
- Recognize states may adjust their public education funding formula. All but four states have a fixed formula that hasn’t been adjusted in the current economy. Connect your legislative agenda to preserve or increase the formula now, before the conversations start without you.
- Conduct a first wave of cuts using creative approaches like shortened instructional staff annual calendars or shortened school weeks.
- Consider step-back planning now to proactively budget for the eventuality of the end of ESSER.
- Prioritize ROI and LOI based on which investments produced the greatest yield.
- Save the people = hiring talent is particularly tricky in the public education sector now, so retain staff, but realize that federal compliances on qualified and certified requirements kick in as soon as 18 months from now.
The plan to step back from big budgets is becoming more and more critical as annual revenue growth rates respond to a slowing economy.
Now is the time to prepare for the rainy day before the bell on Monday.
National Center for Education Statistics. (2022). Public School Revenue Sources. Condition of Education. U.S. Department of Education, Institute of Education Sciences. Retrieved [date], from https://nces.ed.gov/programs/coe/indicator/cma.