Understanding School District Budget Deficits

Large, urban school districts often dominate the headlines, however, smaller districts around the country also struggle with deficits. In this blog, we will dive into the differences between deficits for businesses vs. schools, the most common sources of revenue for a school district, and questions to ask when reviewing your district's deficit position.

If you think that the impact of the Great Recession of 2008 is far behind us, think again. While Wall Street seems to have rebounded, as manifested by stock market performance, Main Street is still feeling the pain. As one of the largest industries in the nation— second only to healthcare— education has struggled to fully recover from the financial crisis in 2008. School districts continue to struggle with persistent challenges such as fulfilling pension obligations, ensuring that classrooms are staffed with the right number of teachers, and confirming that every school is receiving adequate funding.

News of deficits can create panic in school communities. To bring clarity and facts to the conversation, we explain here the factors influencing budget deficits with some guiding questions that districts can ask if they find themselves in one of these situations. But first, some school finance 101.

Deficits: Businesses v. School Districts

One of the first concepts I learned when transitioning from the private sector into education is that the bottom line has a different meaning in education.

In a for-profit business, the following equation rules over all others:

Revenue - Expenses > 0

In a for-profit business, the goal is to maximize revenues while keeping expenses under control. Any monies leftover can be reinvested back in the business. Common examples of such investments may include: employee bonuses, company infrastructure improvements, returning money to shareholders, or an emergency fund. Just as we do with our personal finances, we strive to live within our means and plan to have a little leftover for rainy days.

In education, this equation takes on a slightly different form:

Revenue - Expenses = 0

Surpluses in education aren’t necessarily a good thing. The expectation is that money received in a given year must be spent within that year. The money a school district, school or program receives is underneath a tangled web of formulas. These formulas include factors such as enrollment, grade levels, and student needs, which all change every year. A third grade English Language Learner student will have different needs and costs than a fourth grader with a more advanced understanding of the English language.

What are the common influences on revenue for a school district?

The amount of funding that a school district receives comes from several sources including federal, state, local, and other. 

• Due to the varying degrees of reliance on state v. local funding, we have separated the two sources in the chart above.
• “Other” refers to revenue raised by individual schools (e.g., a school’s PTA) or private grants

When receiving funding from any of these sources, a reduction or a lower-than-expected increase will cause districts to re-evaluate how they’ve planned to spend this money.

What is your school district’s revenue position?

Some questions to ask as you’re thinking through your district’s revenue position include:

• Is a decrease in revenue attributable to a decrease in the number of students enrolled?
• Is a decrease in revenue attributable to a reduction in the state (or city) per student student funding formula base?
• Is a decrease in revenue attributable to significant change within the makeup of the student body, such as reduction in the number of special education students?
• Is a decrease in revenue due to lower amounts of funds raised locally, such as through property taxes, mill levies, etc.?
• Is a decrease in revenue attributable to the reduction or expiration of non-local grants?
• How does your district compare to others in the state in terms of per-pupil funding by source (state v. local)? Do districts with similar student populations and property wealth receive similar state and local support?

What is a lower-than-expected increase in revenues? Let’s say your district is receiving an increase or is held flat to last year. However, in your budget you factored in a cost of living increase for staff salaries. This will result in a deficit if expenses aren’t adjusted accordingly.

What is driving the reduction in revenues? Is it an external challenge or an internal challenge? Is this a one-time, this-year-only situation or will it persist beyond this year?

Answers to these questions will guide you as you plan beyond the upcoming school year.

How does enrollment affect deficits?

In school districts and charter schools where there is a clear connection between number of students and number of dollars, this is the first place to look when there are revenue reductions.

Some questions to ask as you’re thinking through enrollment v. capacity include: Is enrollment decreasing, increasing, or about the same every year? If there has been a substantial, consistent reduction in enrollment over a few years, what systemic changes has the district made to meet student needs at these new enrollment levels? What is the enrollment capacity v. current enrollment of each school building in the district? How many of them are substantially under-enrolled (less than 70% of capacity)? What proportion of district schools are too small to benefit from economies of scale?

We hope that this information will bring more honesty and accuracy to the dialogue around school district deficits.