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Funding California Schools When Budgets Fall Short

Summary

State and district policymakers have difficult decisions ahead in their efforts to balance budgets, maintain school services, and prioritize safety amid the COVID-19 recession. While California’s finances are stronger today than after the Great Recession a decade ago, funding for the school system is still volatile, and K–12 schools could face significant cuts if the state’s economy does not recover quickly. In this report, we aim to understand how the Great Recession impacted funding for California’s K–12 system, how prepared districts are for potential funding cuts, and what policy choices could forge a more financially resilient system.

Concerns over lower state funding and higher expenditures for distance learning and school reopening have brought renewed attention to school reserves. We examine how district-held reserve funds are distributed, how they have evolved over time, and how effectively they shielded districts from spending cuts during the Great Recession. Using data on district spending, revenues, reserves, and staffing, we detail the efficacy of district-held reserve funds, examine areas where cuts occurred in the recession, and determine the state of preparedness districts find themselves in today for managing revenue shortfalls in the future. We find:

  • District-held reserve funds enabled districts to limit spending cuts. Reserve levels varied widely, and districts that held reserves mitigated revenue drops better and saw smaller spending cuts. During the recession, unrestricted local reserves mitigated spending cuts roughly dollar-for-dollar over the five-year downturn.
  • Current district reserves are larger and more equitably distributed. District reserves are nearly twice as large today than before the last recession. Moreover, districts with the highest reserve levels serve larger shares of low-income and Latino students. However, for most districts, current levels are not high enough to fully insure against large revenue drops.
  • Spending cuts in the Great Recession were large and varied considerably across districts. For the average school district, annual spending fell to over $2,000 less per student by 2012–13. However, spending cuts varied across districts, as some districts had small declines and recovered quickly. Districts most affected by the recession, however, had higher shares of disadvantaged students. On a student level, total decreases over five years were roughly $500 larger per student for low-income students, and cuts were larger for Latino and African American students than for white and Asian students.
  • 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. Future cuts—if done proportionally through the Local Control Funding Formula (LCFF)—would have a larger impact on funding in high-need districts.

The repeating boom-bust cycle in school funding hurts students and contributes instability to school operations. 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. 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.

Supported with funding from the Dirk and Charlene Kabcenell Foundation

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