How Private School Choice Complicates Public School Budgets

The Iowa City school district has seen its enrollment grow every school year except one since the turn of the century.

But that changed last school year, when the state rolled out its education savings account program, offering thousands of public dollars each for families to spend outside the public school system on private educational expenses of their choosing.

The state let the district know that 470 students who live within its boundaries had accepted ESAs worth $7,800 each and would not be attending public school for at least that year.

But many of those students were already attending private schools before the ESA offering. The state did not tell the district how many of the 470 students were departing public schools for private options.

Months before the school year had started, district officials assumed that roughly 1 in 6 students who lived within district boundaries and claimed an ESA would be leaving the public school system. With no easily accessible statistics, they had to comb through a state report on private school enrollment, tracking individual student IDs from one school to another, to make their best guess.

All told, the share turned out to be much higher than expected: at least 135 of those 470 students—more than 1 in 4—came from public schools.

That’s a tiny portion of the district’s roughly 14,500 students—hardly an indication that students are flocking from public to private school, even with generous state subsidies enticing them to do so.

Still, thanks to the vagaries of school funding in Iowa, losing 135 students results in a drop in state funding that’s roughly equivalent to 11 full-time teaching positions.

District administrators are projecting at least 75 more public school students will take ESAs in each of the next few years. For the 2023-24 school year, all students who previously attended public school could receive an ESA, as well as any student whose family earned 300 percent of the federal poverty level or less. During the current school year, eligibility expanded to any student whose family earns 400 percent of the federal poverty level or less.

Next school year, every K-12 student in Iowa will be eligible for an ESA.

“Throwing in the ESA program has put us in really uncharted territory in terms of not having solid projections,” said Adam Kurth, the district’s chief financial officer.

The situation in Iowa City echoes the experience of districts in many states with private school choice. As yet, the growing trend of giving parents public funds for private education hasn’t decimated school budgets. Even in states where private school choice is open to all students, the overwhelming majority of K-12 students still attend public school. And in many places, the bulk of the students accepting state dollars for private education expenses were never in public schools to begin with, which means districts don’t immediately lose funding when those students accept school choice funds.

Still, the proliferation of private school choice programs has injected uncertainty and volatility into the already-chaotic school budgeting process. Districts in states including Indiana, Iowa, and Florida have reported losing millions of state dollars as students exit their schools for state-funded voucher and ESA offerings.

Others are bracing for fiscal storms to come as the number of students eligible for newly created and expanded private school choice programs grows, with future prospects for enrollment and financial viability becoming harder than ever to predict. Ohio districts saw increases of up to 600 percent in voucher participants after state lawmakers in 2023 expanded eligibility for the program to all students.

More than half of states have at least one private school choice program, and 12 have one that is on track to be accessible to all K-12 students in the state or already is, according to Education Week’s private school choice tracker.

“Even the existence of these programs introduces a lot of uncertainty into the K-12 school budgeting or district budgeting process, both for revenue this year and/or revenues next year and beyond,” said Ashlee Gabrysch, who helps analyze school districts’ financial health in her role as an analyst at the credit rating firm Fitch Ratings.

Proponents of private school choice acknowledge the effects these programs have on district operations. But they argue those impacts are relatively insignificant and worth the benefits that private school choice affords parents and students.

“Districts might be put in a position to make tough decisions that officials may not want to make or want to deal with” about budget cuts or tweaks, said Marty Lueken, the director of fiscal policy and analysis for EdChoice, the leading nonprofit advocating nationwide for private school choice. “That’s just an uncomfortable reality that I think all actors in the economy have to face..”

Some districts lose money when students move to vouchers and ESAs

One challenge in assessing the impact of private school choice on public school budgets is that every state’s system for school funding and private school choice looks different.

Even within states, districts with lots of nearby private schools will feel higher degrees of fiscal shock than districts in rural areas with few options beyond public schools.

Most states give districts permission to raise local taxes to supplement their budgets when unexpected expenses arise.

But Iowa’s school funding formula imposes spending caps on all districts based on enrollment.

“We don’t have the option to go out and levy additional funds for general fund purposes, things like teacher salaries, even if the community supports it,” Kurth said.

That means enrollment plays an outsize role in determining a school district’s financial condition from one year to the next.

The district lost at least $7,800 for each of the 135 students who left Iowa City schools for an ESA. But the state gives districts roughly $1,200 for each student who lives within district boundaries and accepts an ESA.

Iowa City got $565,000 from that provision. But as a result of the enrollment drop, it still had to cover a budget deficit of $1.3 million, or roughly $90 for each of the district’s remaining 14,500 students.

Out of an annual operating budget of $135 million, that sum might seem insignificant. But with 11 fewer teachers, class sizes would be larger, and secondary students would have fewer options, Kurth said.

The district ultimately eliminated nine teaching positions and several other roles as staff members retired or left for other opportunities; delayed curriculum purchases of $1 million; cut the number of substitute teachers per school building; and increased employees’ health insurance contributions.

The core problem, said Kurth, is that fewer students don’t inherently mean lower costs. Teachers get paid the same amount, and electricity bills barely change, whether 22 or 30 students are in a single class.

“As we lose students, we become less efficient,” he said.

Plus, assuming those 135 students don’t come back to public schools, the district will have $1.3 million less to work with in future years as well.

District leaders want transparency when passing along costs to taxpayers

A loss of revenue isn’t the only consequence of private school choice that has administrators on edge.

In Wisconsin, districts each year receive a bill from the state detailing the total number of voucher funds students who reside within district boundaries are claiming. Then the district divides up that sum among property taxpayers and adds it to their annual bills.

The Kickapoo district in the rural southwestern part of the state doesn’t have any private schools within its boundaries. Relatively few students who attend district schools have opted for a voucher-funded private school.

Still, the amount of voucher funds that went to students living within district boundaries shot up from $25,000 in the 2022-23 school year to more than $113,000 the following year. Those increases came as the state raised the total voucher amount by more than $1,000 per elementary and middle school student and by nearly $3,000 per high school student.

“We’re kept whole financially,” said Melissa Wickert, the district’s bookkeeper. “But it’s moving that burden to our taxpayers, rather than the state funding.”

If taxpayers feel suffocated by higher bills, they might be less inclined to support the school district when it asks their permission to raise additional revenue for long-awaited building projects or ballooning special education expenses, said Kim Johnson, the district administrator who oversees finance.

The Kickapoo district is calling on the state to stop funding private school vouchers with public dollars. Short of that, though, administrators want state lawmakers to require property-tax bills to show residents how much of their money is funding tuition for private schools.

Predicting the future is harder than ever

Some players in the education landscape outside schools themselves lament the increasing uncertainty and unpredictability that expanded private school choice brings.

Every school district has a credit rating, not unlike an individual’s credit score, that helps determine the interest rates it pays on debt, such as bond issues that fuel school maintenance and construction.

Agencies that determine credit ratings use all the information at their disposal to assess the likelihood that a district will be able to pay back its debt. Private school choice has become a confounding factor, two representatives of credit ratings agencies told Education Week.

Expanding opportunities for school choice don’t inherently nudge down a school district’s credit rating, said Gregory Sobel, Moody’s lead analyst for local government credit ratings in Pennsylvania. In some states, funding mechanisms insulate public schools from competitive pressures. But in others, there are a growing number of alternatives for families to consider

“The more [public schools] have to fight for students to stay in their institutions, the more of a challenge it becomes,” Sobel said.

Fitch Ratings, a competitor of Moody’s, calculates credit ratings for districts based on three primary factors: the state’s funding formula, the state’s annual budget appropriations for K-12 education and other expenses; and enrollment trends.

Increasing competition, and the presence of expansive opportunities for parents to collect state-funded vouchers and ESAs, could diminish districts’ ability to pay back their investors on time and in full, said Gabrysch, the firm’s Midwest regional director for local government ratings.

“Even if a district is losing students, they might need to actually spend more money to stem the loss,” Gabrysch said. That might come in the form of hiring new science and art teachers to distinguish their offerings from nearby competing schools or raising salaries to keep pace with growing wages in the area.

EdChoice’s Lueken contends that private school choice programs will be more predictable as they age. Plus, he says, a wide variety of factors beyond private school choice—including charter schools—can dent a district’s credit rating just as much.

Demographers who work with school districts on long-term planning also have found private school choice challenging to grasp.

The North Carolina education department reports the number of students attending private school in each county. But it doesn’t provide any clarity on how many students live in one county but attend school in another.

That makes forecasting enrollment for the state and individual districts increasingly difficult, said Nathan Dollar, the director of Carolina Demography, a private firm that contracts with state and local governments to help them make population projections.

When students leave districts for charter schools, the district pays the student’s “tuition,” making it easy for researchers to see the flow of students from one school to another. But so far, there’s no way to draw similar conclusions about the Opportunity Scholarship program, North Carolina’s voucher, which all the state’s students are now eligible to claim.

“A kid may disappear, and we don’t know where they went,” Dollar said.

Districts need the clearest possible picture of future enrollment, Dollar said. Projections help them determine which facilities might need expansions, which grades may require additional staffing, and when they may need to seek additional funding from state lawmakers or local residents.

“Any population projection necessarily has assumptions that are built into it,” Dollar said. “If those assumptions don’t hold, then the projection will be off.”

State budgets are feeling the squeeze as school choice grows

At the state level, eye-popping budget investments in private school choice have public school advocates worried that cuts may be on the horizon.

Some private school choice proponents counter that vouchers and ESAs represent a separate line item from public education and thus don’t pose an existential threat to public schools.

“That’s like me saying gas prices haven’t impacted my ability to pay my mortgage,” said Josh Cowen, a professor of education policy at Michigan State University who recently published The Privateers, a book detailing the private school choice movement’s trajectory and outlining his case against it. “State budgets don’t work that way.”

Arizona, Florida, and Ohio each spent at least $1 billion on their respective private school choice programs during their most recent budget cycles.

“States that size can’t fund other things when you’re spending a billion dollars on private schools,” Cowen said.

North Carolina’s state budget office this month released a nonpartisan analysis showing that funding vouchers for all this year’s applicants will lead to $75 million in cuts to state aid for public schools. Lawmakers reached a spending deal last week to appropriate more funds to clear the existing waitlist for vouchers.

Discussions of ramping up investment in existing private school choice programs, or creating new ones, are underway among lawmakers in states like Kentucky, Tennessee, Texas, and Utah.

Lueken said such investments make sense as part of an effort to make education systems more student-centered, rather than adult-centered.

“I think we should have confidence that school leaders and district leaders can make the decisions that are in the best interest of the students” when it comes to navigating fiscal turbulence, Lueken said.

District leaders interviewed for this article emphasized they are not against private schools and want students to have all the choices they deserve.

They get concerned, though, when programs designed to increase choice clash with their districts’ ability to maintain operations, said Johnson from the Kickapoo district in Wisconsin.

“When the state cannot fund one school system, they should not be considering funding two systems,” said Johnson.