State education spending: current pressures and future trends.

INTRODUCTION

Since the 1983 report A Nation at Risk, states have increased their focus on almost all aspects of education. For example, states on their own or in response to federal mandates developed new curriculum standards and accountability systems. Many states have increased state aid to reduce the disparity across school districts in per-pupil spending. And finally, many states mandated class-size limits. Not surprisingly, this focus has put upward pressure on education spending. While elementary and secondary education expenditures on a per pupil basis have been growing over time, education expenditures have been relatively stable as a percentage of state budgets (about 22 percent) over the last 20 years. (1) This relative stability is due in part to the fact that expenditures for other state responsibilities have been growing both in overall levels and as a share of state budgets. The most notable of the growing non-education expenditures are state Medicaid expenditures, which have grown from $56.6 billion in 1985 to $267 billion in 2005 and have surpassed education as the largest state spending item. These trends will likely continue as the baby-boom population ages and is expected to live longer, putting upward pressure on Medicaid spending and crowding out other priorities, including education.

Changes in demographic trends across population-age cohorts could have important implications for the need for education spending and the political support for education. As a share of the population, the elderly are expected to grow relative to the share of school-aged children and working adults. Public support for education spending is lower among the elderly, who receive less direct benefits from education than other age groups. States' ability to allocate funds to education may be constrained by pressure from other programs with greater political support. While the percentage of the population that is of school age is forecasted to fall nationwide and in all states, the number of children is expected to grow in some states. These states, given trends in declining class sizes, can be expected to face pressure to maintain or increase spending. While in states with declining school-age populations the need for overall education spending may fall, nationwide the growing student population, coupled with an increased share of disadvantaged and disabled students, indicates a growing need for education spending. However, if demographic changes weaken the political support for education, it may become increasingly difficult to pay for this additional spending.

Will education spending continue to grow on a per-pupil basis or will it be crowded out by other state programs? In this paper we examine current trends in education spending and whether these trends are expected to continue, examining the cost components that have led to increased per-pupil spending levels. We present national trends in the growth and composition of total public K-12 education resources and compare this growth to changes in student and total populations. We demonstrate how states have increased their share of education spending and how this growth in education spending compares to other state budget items. We examine the causes behind the shift to more state financing of education and how states allocated the rising expenditures across different spending categories. We then look forward, first describing the predicted changes in the age and racial profile of the U.S. and then examining how we expect existing spending trends and future demographics to interact and affect education spending. We think existing spending trends will continue, putting pressure on states to increase per-pupil spending, but political considerations prompted by demographic changes, especially reduced support for schools as the population ages, might mitigate this effect.

EDUCATION RESOURCES AND POPULATION TRENDS

Figure 1 presents real per-pupil revenues for K-12 education from the 1971 through the 2004 school years. (2) The top line of the graph represents total revenues from all sources. Real revenues per student more than doubled over the period, from just over $4,200 in 1971 to just over $9,000 in 2004 (in 2003 dollars). During the same time period, real education revenues per capita increased less dramatically by 54 percent, reflecting smaller growth rates in enrollments as compared to the overall population.

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Table 1 decomposes whether the increases in per-pupil spending are coming from increasing revenues for education or a declining number of students by examining levels of spending at five-year intervals between the 1971 and 2001 school years and for the 2004 school year. Real total revenues grew 2.8 percent per year in the early 1970s, but fell in the late 1970s by about one percent per year before increasing continually since the 1980s. This decline in real revenues during the 1970s is largely due to the increased level of inflation. Enrollment in public schools fell in the 1970s and mid-1980s before increasing again over the last 25 years. While spending per pupil increased, it is important to recognize that the percentage of the school-age population was falling, while the working age population was increasing. Thus, the burden of spending more per student was borne by a growing working age population. Real revenues have grown strongly since the 1980s, outpacing both population and enrollment changes.

While student populations were falling in the first half of this period, Table 1 illustrates that the number of teachers grew by an average of 1.1 percent between 1971 and 2004, with only a slight decline between the 1976 and 1977 school years. Consequently, student-teacher ratios were falling for most of this period and can partly explain spending per-pupil growth. We further discuss the relationship between spending increases and teachers in the fourth section.

Figure 1 and Table 1 also demonstrate that the sources of resources changed substantially over the last three decades. The figure reports the cumulative revenues from federal, state, and local governments. Although local funding increased throughout this period, revenues from state sources rose more quickly between 1972 and 1987 and, as a consequence, the states' share of total resources increased from 38 percent in 1972 to 49 percent in 1987. Revenues from the states then grew slowly from 1987 to 1992. By 1992, local governments contributed only 47 percent of all public education resources, down from 53 percent in 1972. More recently, as Dye and Reschovsky (2007) point out, this pattern has tempered. After the 2001 recession, state spending grew at a slower rate and the state share of spending actually decreased slightly between the 2003 and 2004 school years. Local revenues, while still a smaller share than state revenues, have grown steadily since 2001. We believe this shift back towards local revenues is a temporary phenomenon, reflecting the strength of property values (and property taxes) during the last recession, rather than a shift away from long-term trends. In 2004, the state share of education revenues was 47 percent, while the local share was 44 percent and the federal share was nine percent. The federal government played a small and shrinking role in education finance between 1972 and 1992, but in the last decade federal participation has increased with the passage of No Child Left Behind, growing from seven to nine percent of total education revenues between 2001 and 2004.

The growth in the state share of education spending arises either at the expense of other responsibilities of state governments or through the growth in state revenues. As we noted in the introduction, spending on elementary and secondary education has been relatively stable as a percentage of state budgets (about 22 percent) over the last 20 years (NASBO, 1987-2006). Thus, state budgets have been growing over this period, with total real state revenues increasing from 513 billion dollars in 1985 to 1,166 billion dollars in 2005 (NASBO, 1987-2006). Other spending areas, most notably Medicaid, have been increasing their shares of state budgets.

Total state and local spending has also increased. In Table 2, we examine the share of state and local budgets going to education expenditures and other spending areas, using data from the Census of Governments. (3) When we include local budgets, we find that state and local spending on K-12 education as a share of total spending fell from 28 percent in 1972 to 24 percent in 1985, but has remained relatively stable since then. In contrast, public welfare (the category that includes most Medicaid expenses) was relatively stable at 12.5 percent of spending from 1972 to 1985, but has been increasing since and currently makes up 17.6 percent of state and local expenditures. (4) Thus, spending on education has maintained a relatively constant share of state, and state and local, budgets over the last 25 years. This has largely been due to overall growth in state and local spending. However, it is important to note that other budget items, most notably Medicaid, have been growing more quickly and are making up an increasing share of state (and state and local) budgets.

THE GROWING STATE ROLE IN FUNDING SCHOOLS