Several major forces — including an increase in staffing costs and falling birth rates — are combining with the federal funding cliff to squeeze district budgets.
The K-12 sector will face a tightening operating environment in the next few years that will challenge school systems, according to a recently released Moody’s Rating report.
That marks a shift from the “exceptionally favorable” operating environment for U.S. school systems the past few years.
According to Moody’s, the factors at play include those frequently making headlines — including the end of the national, $190 billion infusion of federal pandemic-era aid and proliferation of private school choice — as well as some that are more subtle and long-term, like the evolving shifts in the school-aged population.
And some districts are better set up for resilience than others.
School systems are “readjusting to live in a more normal time, given the unprecedented nature of the last couple of years,” said Daniel Thatcher, a senior fellow in education at the National Conference of State Legislatures. “It can be translated into pain at the district level.”
Cost of Staffing Rises
The cost of salaries and benefits are significantly rising for school districts because the number of workers they employ is growing after a few years of relatively low fill rates, according to Moody’s.
Staffing levels in schools are now above pre-pandemic levels for the first time, according to the report. Plus, many districts raised salaries to in an effort retain and attract workers, which has been a major challenge for school systems across the country.
“Both developments represent a reversal from the trend that held for most of the last few years,” Moody’s report says, “when districts were struggling to fill positions and compensation growth was constrained, leading to strong financial results.”
Some of districts’ hiring and retention was propped up by stimulus aid, which many districts used to hire staff aimed at addressing learning loss, including counselors, tutors, and math and reading specialists, Moody’s reported.
Schools have also been able to backfill positions left open during a surge of resignations and retirements during the pandemic, the report says.
Wages in K-12 have also begun to rise, and are in fact now rising at a rate that is slightly faster than in the private sector, Moody’s reported. Especially as multi-year contracts with local teacher unions end and districts are negotiating for higher salaries.
State policymakers have also contributed to higher costs, by taking steps to raise teacher pay, said Thatcher.
“That’s been a huge effort of legislatures over the last couple of years,” he said. “Any increases at the state level in K-12 education have largely gone towards salaries. It doesn’t surprise me that education employment has caught up with the private sector, because the revenues at the state level have outperformed expectations since the pandemic.”
Thatcher notes that while staffing levels may look similar to those in 2019, the industry has not recovered to the staffing levels seen before the 2008 recession.
Districts continue to struggle to fill specialized positions. Special education teachers and bus drivers are especially challenging to find, the report notes. And rural and large city schools often have the most difficulty filling positions.
It turns out there’s just a huge swath of areas of the country that are just slowly losing students.
Daniel Thatcher, National Conference of State Legislatures senior fellow
“That could also help explain why there are unfilled [full-time positions] in certain [areas] of the education sector,” he said.
Population Changes
The number of school-aged children, as well as the number of families who choose traditional public schools over alternatives — including charters, homeschooling or private schools — is expected to decline over the next decade, Moody’s reported.
Some states will be harder hit than others, according to the report. California, New Mexico, and Hawaii are expected to see the greatest percentage decline in total enrollment between 2021 and 2031, the report said, citing data from the U.S. Department of Education and National Center for Education Statistics.
States including Florida, Tennessee, South Carolina, and Utah, on the other hand, are expected to see the greatest K-12 student enrollment growth.
“The impact of the enrollment is really starting to be understood better,” Thatcher said. “During the pandemic, we were experiencing fluctuations, but we didn’t know how long they were going to last… It turns out there’s just a huge swath of areas of the country that are just slowly losing students.”
For districts, deciding how to respond can be tricky, the report noted. Reducing spending on programs and staff as enrollment falls can cause a “downward spiral,” it says.
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“That reduction can weaken a district’s effectiveness and educational outcomes, prompting even more students leave the district,” Moody’s analysis states. “The loss of those students results in additional revenue losses, prompting further cuts, and so on.”
Overall, districts will be in a stronger financial position if they are in a state that provides regular and predictable increases in aid to schools, the report says. Or if they are in an area where taxpayers vote to support an increase in property taxes to support their local schools.
Districts that funnel money into their rainy day funds, or reserves, will also “have more runway to respond” to financial pressures, the report said. While those reserves are generally larger than before the pandemic, the amount that districts tucked away varies by state and K-12 system.
“When I’m looking at the broad picture, I think revenues at the state level are consistent — growing in some areas. So it’s a steady ship, as far as I see right now in terms of revenues,” Thatcher said. “But then, of course, all this can change on a dime.”