Academic journal article Federal Reserve Bank of New York Economic Policy Review

The Great Recession's Impact on School District Finances in New York State

Academic journal article Federal Reserve Bank of New York Economic Policy Review

The Great Recession's Impact on School District Finances in New York State

Article excerpt

1. INTRODUCTION

The financial crisis and the Great Recession that followed led to declining tax revenues, which, in turn, strained state and local government finances. Property, income, and sales tax revenue were all hurt by the bursting of the housing bubble and a weakened labor market, and these decreases in revenue limited state and local governments' ability to fund school districts. Starting in the fall of 2009, the federal government, through the American Recovery and Reinvestment Act (ARRA), allocated $100 billion to states for education in an effort to lessen the impact of decreased state and local funding and stave off serious budget cuts. New York State received $5.6 billion of the ARRA stimulus funding and an additional $700 million from the Race to the Top Competition. (1)

Because schools are an indispensable part of our economy and society and have an undisputed role in human capital formation and the shaping of the nation's future, it is essential to understand how the Great Recession affected schools and what, if any, repercussions the recession might have on school funding and spending and hence the delivery of educational services and student learning. While a slowly emerging literature seeks to understand how the Great Recession affected other parts of the economy, there is surprisingly little literature on how it affected schools (Chakrabarti and Sutherland 2013). This article starts to fill the gap. Here, we study the ways in which New York State's school funding and expenditures, as well as the composition of each, were affected by the recession and the federal stimulus. In addition to investigating aggregate trends, we analyze whether there were variations in these patterns across metropolitan areas, poverty levels, district sizes, and urban status (urban, suburban, or rural). New York is of interest primarily because it includes New York City, the country's largest school district. In addition, New York's is the third-largest state school system, serving 5.6 percent of the nation's students. (2) Also notable is the state's diversity: it contains a range of urban, suburban, and rural districts, with a wide distribution of income levels.

Some interesting findings emerge. There is no evidence of any statistically significant shift--relative to trend--in either total funding per pupil or total expenditure per pupil after the recession. (3) But while we find no evidence of overall shifts, there is robust evidence of compositional shifts within both funding and expenditures. With the infusion of federal stimulus funds, state aid shifted downward (relative to trend), and so did local funding. Meaningful shifts are also observed in the composition of expenditures. Instructional expenditures, the key category that most directly affects student learning, remained on trend. In contrast, noninstructional categories such as student activities, student services, transportation, and utilities and maintenance ("utilities") experienced cutbacks (relative to trend), although the effects were not always statistically significant. See Table 1 for descriptions of the various expenditure categories.

In addition to these overall patterns, we find considerable variations within the state. Affluent districts were the worst hit in terms of both funding and expenditure (relative to trend). Noninstructional expenditures fell the most in these districts, and unlike high-and medium-poverty districts, affluent districts exhibited a fall in instructional expenditures as well. Analysis by metro area reveals that Nassau County experienced sizable downward shifts both in total expenditure and in its various components. New York City also experienced some declines, though they were considerably smaller economically than those in Nassau County. There were heterogeneities by urban status as well. Urban districts exhibited the largest declines in both instructional and noninstructional expenditures, although these declines were not always statistically significant. …

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