For decades, education funding equity has been a primary aim of K–12 finance reform efforts. But the latest research, along with mounting fiscal challenges for many school districts, underscores a need for fresh thinking in an era that’s no longer defined by savage inequalities.
For starters, public school enrollment has dropped by 1.4 million students nationwide since the start of the Covid-19 pandemic and is projected to fall by another 2.7 million students by the 2031–32 school year. But school districts have been slow to cut costs by closing schools and reducing staff as their student populations shrink, putting some at risk for insolvency.
Making matters worse is nearly $400 billion in teacher pension debt that states have amassed, about $9,300 in debt per public school student. Pension debt crowds out dollars available for things that drive results—like competitive salaries that would attract and retain the best teachers—and states are on the hook for their pension promises, which are constitutionally protected, regardless of how many students are in classrooms.
Another challenge for educators is mission drift. Even before the pandemic, non-teaching staff such as counselors, social workers, and instructional aides were on the rise, and now comprise over half of all public school employees. Much of this “staffing surge” can be attributed to special education, but competing priorities—such as spending on community schools and social-emotional learning—also divert resources from core academics.
Finally, public schools are in a learning recession, with math and reading scores declining for more than a decade. Pre-pandemic trends, including large and sustained K–12 funding increases, suggest that states can’t simply spend their way to better student achievement. Policymakers need to find ways to get more from the $1 trillion spent on public education each year, including boosting the supply of meaningful alternatives for families.
To address these and other challenges, a new era of K–12 finance reform should focus on three policy goals. These aims, and eight ways state policymakers can get started, are described below.
Policy goal #1: Improve financial performance through transparency and accountability
States must shine a light on K–12 finance systems by providing clear and timely information on key trends. But they should go beyond simply reporting the basics—such as revenue, tax, and expenditure data—by tying fiscal health to policies that can improve financial performance.
- Fiscal health frameworks: Many school districts are on shaky financial footing. States need fiscal monitoring systems that capture the right metrics, make this information accessible to parents and policymakers, and link performance to meaningful interventions. For instance, Texas rates the fiscal health of school districts on an A-to-F scale, and California has escalating interventions ranging from assigning external consultants to advise districts to vetoing spending decisions that threaten their solvency.
- School capacity data: School districts have been slow to close under-enrolled schools, stretching resources thin. But in many states, it’s difficult or impossible to know which school buildings are half-empty or bursting at the seams. States should collect and report data identifying underutilized and vacant school buildings, as Florida does. These data could feed into policies, such as right-of-first-refusal and co-location laws (discussed below), that give proven charter schools access to critical, underused infrastructure.
- Local funding transparency: When enrollment falls, school districts lose any state aid that’s tied to student counts. But that’s not the case with local operating levies, which are based on tax rates and assessed valuations. As a result, districts can end up collecting more money to serve fewer students and have less incentive to right-size. When enrollment declines hit a specified threshold, local tax rates should be rolled back to maintain an inflation-adjusted per-student amount. Districts could seek voter approval to maintain their existing levy rates, preserving local control.
Policy goal #2: Build fiscally sustainable K–12 systems for future generations of kids
K–12 finance systems should serve today’s students while meeting long-term challenges, especially declining enrollment and legacy costs. This means using scarce resources strategically and in fiscally responsible ways.
- Teacher pension reform: K–12 funding is increasingly diverted to public pension costs, even as many states have reduced benefits for teachers. States need to pay down pension debt as fast as possible and modernize antiquated assumptions about investment returns and retirement benefit designs.
- Current-year enrollment counts: Many states allocate dollars for students who are no longer enrolled, otherwise known as “ghost students.” This makes budgets more predictable, but it is also expensive and disincentivizes districts from right-sizing. Staffing costs are difficult to shed in the short run, but school districts in states like Arizona, Indiana, and Texas—where funding is based on current-year enrollment—show that funding ghost students isn’t necessary, even if districts can’t easily adjust payrolls mid-year.
Policy goal #3: Get a better return on investment from K–12 dollars
Last but certainly not least, states should adopt funding reforms that make education dollars more productive. For policymakers, this means focusing on academic outcomes and growing a K–12 marketplace that gives families public and private alternatives. While this is easier said than done, promising opportunities exist to get better returns from taxpayer dollars.
- Funding system modernization: K–12 finance systems were built for a different era, and many aren’t compatible with school choice policies like education savings accounts (ESAs) and open enrollment, which allows students to attend any public school with open seats. To make these programs accessible and durable, policymakers need to address thorny problems that drive up costs, limit participation, and diminish schools’ incentive to serve students. For example, ESA participants in West Virginia and New Hampshire only get a fraction of public school per-student funding, and school districts in Ohio have little incentive to participate in open enrollment. These issues should be front and center in any school finance reform effort, but they currently aren’t.
- Facilities access and financing: Public school closures, while difficult, are necessary in many districts losing significant numbers of students. They can also be an opportunity to give proven charter schools access to the facilities they need. Charter schooling is the most successful education reform in the past three decades, and policymakers should support its growth by adopting or strengthening right-of-first-refusal and co-location laws that put charters first in line to access vacant or underutilized buildings. Other low-cost financing mechanisms, such as revolving loan funds, credit enhancement programs, and tax-exempt bonds, offer innovative ways for policymakers to boost the supply of K–12 options, as Idaho’s experience demonstrates.
- Public school deregulation: In an era defined by declining enrollment and school choice, public schools must compete for students. State policymakers can help simply by getting out of the way. States regulate public school spending in myriad unhelpful ways, ranging from class-size mandates to required or recommended staffing ratios for school counselors. They also encourage or require districts to pay teachers based on educational attainment, which is weakly related to student achievement. These and other regulations, while well-intentioned, limit local spending discretion, incentivize hiring non-teaching staff, and ultimately prevent public schools from competing on a level playing field.
Conclusion
Public education is changing rapidly, and today’s challenges won’t be solved by yesterday’s ideas and priorities. A K–12 finance agenda aimed at transparency, sustainability, and productivity can help state policymakers navigate the decade ahead. The eight policies shared here are just the beginning, but they can kickstart a new era in K–12 finance.
