Managing School District Finances in an Era of Declining Enrollment

Memo 1131, January 2015

Today, more than anything, officials charged with managing the governance and finances of Michigan school districts need the tools to manage the districts through an era of declining student enrollment. Many district officials have recognized the problems caused by declining enrollment and have attempted to proactively adjust to the circumstances, but the economics of school finance suggest that state policy reforms could better empower them to manage during this era.

With the Great Recession several years behind us, the financial picture for many Michigan school districts is beginning to improve, albeit not as quickly as some would like. Despite the general improvement statewide, a number of school districts continue to deal with financial problems caused by two issues: retirement legacy costs and declining enrollment. If unaddressed, these problems can develop into significant sources of fiscal stress, making it difficult to deliver quality educational programs and services.

The origins of school financial problems and fiscal stress vary across districts. In some cases, major problems arise from a history of poor financial practices and the reluctance of school officials to adequately deal with changing circumstances. For other districts, financial problems arise through little fault of their own as factors outside their direct control play a significant role.

Annual student enrollment is a major factor in setting a district’s total financial base. While enrollment changes may be a response to the educational offerings of a district, they also occur because of broad demographic shifts (e.g., lower birth rates), changing economic factors (e.g., loss of a major employer), and shifting migration patterns, over which school officials have no control.

The structure of the school finance system and the nature of school cost pressures can contribute to the challenge of responding to declining enrollment, particularly in the near term. Moderate to substantial declining student enrollment is a common characteristic among troubled districts; fewer students mean fewer total resources under Michigan’s per-pupil school funding system. School districts that experience substantial revenue declines from enrollment losses are required to make major budget adjustments in short order. Because the majority of school cost pressures are largely fixed in the short term, managing down to meet a much smaller revenue base can be difficult in the short run.

As lawmakers contemplate the menu of school finance issues that they may want to tackle in the coming months (e.g., overall funding levels, changes to the per-pupil foundation grant, and the allocation of funds among districts), they should be cognizant of the increasing importance that even moderate enrollment changes play in a school district’s fiscal health.

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