DEATH BY A THOUSAND CUTS:
Fixed Costs, District Budgets, and School Privatization
A common argument advanced by supporters of education savings accounts (ESAs), private school tax credits, and other school voucher programs is that school vouchers programs will not take money from public schools. The argument runs something along the lines of “it doesn’t take money from public education because they don’t have to teach that child.” While this response has a certain facial appeal, it ignores basic concepts from Economics 101–namely the difference between fixed and variable costs.
Here’s why. The impact of voucher subsidies on public school enrollment is unevenly distributed across districts and individual campuses. Vouchers do not empty an entire campus, or even an entire class of 2nd graders–rather the impacts occur in ones and twos across various classrooms and grades within individual campuses and hit some campuses harder than others within a district based on factors such as mobility and the proximity of private school options. A district or campus is left with fewer resources yet may still require the same number of classrooms, teachers, school buses, and specialized services to serve remaining students.
While a small portion of cost savings can be realized right away when one individual student leaves, other savings are harder to achieve without the loss of a sufficient number of students to justify eliminating a classroom, closing a school, or consolidating a school district. A report on the impact of choice policies on district finances explains the dynamic as follows:
…[D]istricts are generally unable to adjust their expenditures on a student-by-student basis, because costs range from fixed costs (districtwide and school overhead costs that are not reduced by the transfer of individual pupils), to step costs (including classroom level costs, also not reduced by the transfer of individual pupils) to variable costs, which are most easily reduced on a student-by-student basis, but constitute a relatively small share of school district budgets[i].
This means the districts facing declining enrollments often struggle to reduce cost as rapidly as budgets fall. The table below draws on Public Education Information Management System (PEIMS) annual financial data reported by school districts and charter schools to categorize Texas public school expenditures into those that are student-, classroom-, school-, and school district based.[ii]
Contrary to claims that such financial incentives cause districts to improve, pressure on district budgets due to vouchers and other choice mechanisms may actually cause districts to divert funds from teaching and programs to capital outlays and marketing costs to compete with private operators marketing for students, resulting in further deterioration of the educational offering.[iii]
Senate Bill 3 includes a provision that purports to diminish this impact by giving districts a one-year subsidy for students who select the voucher and leave the public school system. The subsidy amounts to half of the difference between the voucher amount and average M&O expenditures for the prior-year (or between 5 and 20 percent of M&O expenditures). This one-year payment will be insufficient to allow districts to fully absorb relatively fixed costs as overall revenue declines.
Policymakers should not be taken in by rhetoric that attempts to diminish the potential fiscal impact of a taxpayer-funded government subsidy for private schools on public school finances. If enacted, they are a real and present danger to districts’ ongoing ability to adequately fund a quality educational offering and their impact will be to erode quality for those students who remain in public schools.
[iii] Cohen, G.R. and Cook, J.B., “The Role of Fiscal Impacts in the Public School Response to Charter Competition (Cornell, 2016) (working paper), http://www.economics.cornell.edu/sites/default/files/files/events/Cohen_Cook_2016_Fiscal_Impacts.pdf. (While this paper focuses on charter competition, the fiscal impacts are similar).