New EdChoice report explores hold harmless policies
A common concern about educational choice policies is that they impose potential fiscal detriments to public schools because their funding decreases when students leave via choice programs. But, many states have funding protection policies that are designed specifically to mitigate funding declines for public schools.
There are two main funding protections: declining enrollment protections and funding guarantees, also known as “hold harmless” funding.
Declining enrollment protections are meant to help districts cope with enrollment reductions by softening the impact on their budgets. For example, if a district experiences a decline in enrollment during a given year, then the state might base the district’s funding on enrollment levels from previous years instead of basing it on the year when enrollment fell.
Funding guarantees assure that a district will receive at least some specified level of funding. For example, these provisions may guarantee that districts receive no less state aid than they received during some specified year in the past.
In addition to these protections, many states enacted temporary funding protection provisions during the Covid pandemic to help states cope with funding reductions associated with significant enrollment declines.
As with any policy, there are benefits and downsides to funding protections.
Funding protections offer districts revenue stability with declining or fluctuating enrollment and a measure of budget predictability. Declining enrollment provisions provide districts with extra time to revise budgets and make necessary changes when they lose students. Stronger provisions like funding guarantees have a major advantage for districts in that they can know there will be no significant year-to-year decline in state revenues. Moreover, they don’t need to worry about how changes to the composition of their student body may impact student revenues and adjust to these circumstances.
While these policies provide upsides for districts by insulating them from making difficult management decisions, there are downsides to these policies as well.
There are at least three potential downsides to funding protections. First, they increase education costs for taxpayers because the state pays districts for students they no longer enroll. Second, funding guarantees, which provide a perpetual source of funding, may also unnecessarily direct state funds to districts when their financial circumstances are improving or to districts that have high amounts of local wealth. Such policies can undermine efforts to increase fiscal equity among districts. Finally, these policies dampen incentives for districts to improve when students leave because they don’t lose all or part of the state funds tied to those students.
Funding Protection Policies
EdChoice enlisted Hanover Research to conduct a scan of funding protection policies for all states. The policy analysis identified a total of 34 states that provide districts with declining enrollment protections, funding guarantees, or both. In addition, 27 states enacted temporary provisions during the Covid pandemic aimed at mitigating funding losses that largely occurred from enrollment decline. Between 2020 and 2023, 42 states had permanent or temporary funding protections in place to help districts cope with their finances.
The strength of funding protections varies considerably. Some states have strong funding protections for public schools which are based on historical funding levels and guarantee a level of funding perpetually. Missouri districts do not receive less per-pupil funding under their state’s funding formula than they did before the formula was enacted in 2005. Pennsylvania districts receive no less funding than they received during the 2014-15 school year.
Other states, like Iowa, have weaker funding guarantees. School districts in Iowa that experience enrollment decline may receive 101 percent of funding from the previous year and have one year to adjust. Thus, this provision provides extra funding for these districts while postponing the effects of declining enrollment on the district’s budget for one year.
Many states have declining enrollment provisions which protect district finances from funding decreases. For example, Illinois bases funding on current year enrollment or a 3-year average, whichever is greater. Colorado uses current year enrollment or the greater of the 2-year, 3-year, 4-year, or 5-year average enrollment. In addition to its funding guarantee, Missouri has a declining enrollment provision that protects districts from funding declines by using the highest enrollment count from the past three years.
Funding systems for public schools in the U.S. are very favorable to districts. Not all of a student’s per-pupil funding follows that student when they switch from public schools. Districts in most states also enjoy additional layers of protection from funding losses due to enrollment declines. More than half of states have enrollment decline provisions or funding guarantees embedded in their funding formulas. Therefore, when policymakers deliberate ways to increase educational options for families, fiscal harm to public schools is a weak argument.
To dig deeper into how choice policies affect state education funding, EdChoice released two reports on the state-by-state funding protections for public schools.
The first paper, How States Protect Funding for K-12 Public Schools: A primer on funding protection policies, is co-authored with James Shuls, an EdChoice fellow and assistant professor at the University of Missouri, St. Louis. This paper introduces the topic of funding protections and discusses the benefits and downsides from these policies.
The second paper, How States Protect Funding for K-12 Public Schools: A summary of state policies, depicts the funding protections policy landscape. It summarizes which states have different kinds of funding protections. Readers interested in digging deeper into these policies should check out the companion, How States Protect Funding for K-12 Public Schools: State profiles index, which provides state profiles and details the policies for each state.