Lesson Learned: When the pandemic hit, states knew how to handle education dollars in a downturn.

• Author: Thatcher, Dan
• Position: THE MONEY ISSUE

A year ago, states faced an avalanche of frightening revenue forecasts. Prospects for a slashing to state K-12 education budgets over the next few fiscal years were worthy of a John Carpenter film. By the time 2020 ended, 13 states sliced $3.4 billion from their K-12 education budgets. Fiscal year 2021 budgets fared even worse, with 14 states reducing K-12 spending by $7.4 billion from previous year spending. Another 10 states reduced K-12 by $1.4 billion later in the year, a 2.6% decline from 2020.

Local school districts began counting their losses while also trying to count their students, which determines how much aid districts receive from states. At that moment, most of the federal largesse that later came to schools was just a twinkle in Congress' eye.

Then something unexpected happened: Faced with an unprecedented scenario, many state legislatures treated K-12 education budgets differently than they had during other economic downturns.

They were ready, this time. And here's why.

Past Was Not Prologue

But first, two separate but intertwined phenomena need explanation. Spending on K-12 education comes from three sources: local, state and federal. And state revenue behaves differently than local revenue during economic downturns.

For the past two decades, states have provided about 46% of the total revenue to K-12 education (45% and 9% for local and federal revenue shares, respectively). But federal law, in most instances, precludes states from using federal aid to supplant state spending on education. So minus federal revenue, the average shares of revenue from state and local governments are 51% and 49% respectively--a near parity.

The reliance on state versus local revenue, however, varies dramatically across the states. Local revenue in Nebraska and New Hampshire, for instance, accounts for about 65% of state and local totals. On the other end of the spectrum, some states such as Hawaii and New Mexico fund K-12 education almost entirely with state revenue. State governments typically rely on different taxes than local governments to fund their share of K-12 revenue. States lean mostly on income and general sales taxes. Local governments, for their part, rely on property tax--and there's the rub.

When an economic downturn occurs, the taxes relied upon by state governments--largely income and general sales--decline quickly and significantly due to slowdowns in economic activity. Property tax revenue, on the other hand, tends to inch...