In a nutshell:

• At the end of the 2020-21 school year, the state’s public schools had amassed $3.3 billion in combined budget reserves, up from $2.4 billion pre-pandemic. 
• It appears now that districts’ decisions to replace spending from their general fund resources with a portion of the funding they received from the early rounds of federal relief provided fuel to grow their budget reserves.
• Given state and federal revenue increases over the past couple years, combined with growing surpluses, it is hard to avoid the conclusion that Michigan’s K-12 public schools, overall, are currently very healthy from a fiscal perspective.

Michigan’s eye-popping $10.3 billion projected state budget surplus has been well-documented and has spurred various tax relief proposals over the last couple months. At the same time, there has been far less public attention directed at the current fiscal health of the state’s public K-12 schools. They too are sitting on historic surpluses. At the end of the 2020-21 school year, the state’s 800-plus local public school districts had amassed $3.3 billion in combined budget reserves, up from $2.4 billion pre-pandemic. 

While continued state funding increases since the onset of the pandemic have likely helped drive some of this growth, the influx of nearly $5.2 billion in federal COVID-19 relief dollars earmarked for local districts to respond to the public health emergency also played a major role. It appears now that districts’ decisions to use a portion of the funding they received from the early rounds of federal relief in place of their regular general fund resources provided fuel to grow their budget reserves. Schools have been able to take advantage of the flexibility surrounding the allowable uses of these one-time resources. By doing so, schools have been able to hold in reserve their discretionary general fund dollars, and, if effect, extend the amount of time they have to spend the additional relief dollars they are receiving.

Growing Reserves

One commonly used metric of financial health for public schools is the amount of year-end general fund reserves on hand. These are discretionary resources that a school has to fill future potential shortfalls. Often, general fund reserves serve as a proxy for the size of a school district’s “rainy day” fund. Examining the change in the amount of rainy day funds over time can provide a signal of improving or deteriorating health; if the change is positive, the district likely recorded an operating surplus, while a negative change suggests an operating deficit.

After tapping their budget reserves to cope with state funding reductions caused by the Great Recession, Michigan school districts steadily rebuilt their savings in the years that followed. Leading up to the onset of the COVID-19 pandemic in the spring of 2020, public schools collectively doubled their general fund reserves from $1.2 billion at the end of FY2014 to $2.4 billion by the end of FY2019. By the end of FY2021, districts had over $3.3 billion in reserve; a 40 percent increase over the FY2019 pre-pandemic amount. Statewide, this equates to 17 percent of the total general fund revenue districts received in FY2021 ($19 billion) compared to just 14 percent of revenue in FY2019. 

For another perspective, consider the amount of reserves on a per-pupil basis. On average statewide, districts had the equivalent of $2,300 per-pupil in reserve at the end of FY2021, up from $1,600 per-pupil at the end of FY2019. This equates to a little more than one-quarter of the per-pupil foundation grant in FY2021 ($8,111). It should be noted that total K-12 student enrollment dropped by about four percent during this period, accounting for some of the observed change in the amount of per-pupil reserves. 

The growth in savings at the individual district level is also noteworthy. The chart below groups traditional public school districts by the amount of general fund year-end reserves (as a percentage of revenue) for each of the last three fiscal years. As of FY2021, 42 percent of the districts (220 of 524 districts) had surplus amounts in excess of 20 percent of general fund revenue. This compares to just one-quarter of districts (129 districts) in FY2019. A total of 70 percent of all districts (370 districts) had reserves in excess of 15 percent of revenue in FY2021; an amount considered to be a fiscal best practice for schools and government.

Traditional Public School Districts’ Reserves as Percent of Revenue

Source: Center for Educational Performance and Information

Similar improvements are seen among charter school districts. Of the 241 charter schools reporting data for the three-year period from FY2019 to FY2021, 58 percent had reserves in excess of 15 percent of revenue in FY2021, the fiscal best practice threshold. This is up from just 43 percent at the end of FY2019.

Further, it appears that fewer districts are exhibiting signs of financial distress. Just four traditional public districts (less than one percent) had reserves below 5 percent of their FY2021 general fund revenue. In contrast, 41 districts met this condition in FY2019, including nine that recorded a year-end general fund deficit according to the state Department of Education. No traditional public school district recorded a deficit for FY2021, while the number of charter schools reporting a deficit shrank from five in FY2019 to four in FY2021.

Bottomline, the amount of year-end budget surpluses held by both traditional public and charter public schools statewide has increased substantially since the start of the pandemic, a clear sign of improving fiscal health overall.

Revenue Increases and Federal Discretion Drive Improvements in Reserves

The remarkable growth in schools’ reserves over the last three years was not predicted when the pandemic took root in early 2020 as state aid cuts loomed with the prospect of a severe economic downturn. In fact, early indications suggested that schools were going to have to tap deep into their savings, as well as control their spending, to navigate the fiscal disruptions expected to arise in the 2019-20 school year and beyond. 

Looking back today, it is clear that schools exercised some spending restraint in the early months of the pandemic. But, state funding cuts never materialized. Just the opposite occurred. Schools saw sizable increases in state funding as state tax coffers ballooned in response to the various rounds of federal stimulus payments to Michigan individuals and businesses. 

Adding to the state funding increases, the federal government stepped in to provide schools with three rounds of COVID-19 federal relief funding. This further fueled total school funding growth as reflected in the charts below.  These charts show total K-12 general fund revenue by source in FY2019 and FY2021. 

Total K-12 General Fund Revenue, FY2019
(dollars in billions)

Source: Center for Educational Performance and Information

Total K-12 General Fund Revenue, FY2021
(dollars in billions)

Source: Center for Educational Performance and Information

Total K-12 general fund revenue jumped from just under $17.4 billion in FY2019 to almost $19.0 billion FY2021, an increase of more than nine percent. This growth was fueled in part by a four percent bump in state funding ($12.3 billion to $12.8 billion) since FY2019, historically the largest component of the overall K-12 funding pie. 

However, federal funding was chiefly responsible for driving total general fund revenue to new heights in FY2021, providing an additional $1 billion above the FY2019 amount. This includes an extra $836 million earmarked for COVID-19 relief that came through the first two installments of Elementary and Secondary School Emergency Relief (ESSER) funding. This piece alone accounts for five percent of total K-12 general fund revenue in FY2021. It should be noted that the third, and largest, round of federal relief dollars did not start flowing to public schools until after FY2021 and is not included here.

Generally, federal education funding must be used to supplement the existing streams of state and local dollars received by schools. This is the case with the largest ongoing federal funding source, Title I, Part A (Title I) of the Elementary and Secondary Education Act of 1965. The purpose of Title I is to “provide all children significant opportunity to receive a fair, equitable, and high-quality education, and to close educational achievement gaps.” To realize this purpose, there has been a longstanding requirement that Title I funds must supplement, and not supplant, state and local funds spent on children participating in Title I programs.

Unlike Title I dollars allocated to local schools, the various rounds of federal ESSER funding are not subject to “supplement not supplant” requirements. This effectively allows schools to substitute their state and local spending with federal spending on those programs and services that satisfy an “allowable use” for the COVID-19 relief funds. As we noted in a previous blog that examined schools’ use of relief dollars, the federal law lists 20 broad allowable uses that provide schools with considerable discretion and few restrictions on the use of funds.  However, as others have pointed out, few categories of current ongoing school spending would not meet one of the 20 allowable uses. This is especially true as schools continue to respond to the pandemic’s effects on students’ disrupted learning, as well as their current physical and mental health well-being. 

The broad discretion provided in the allowable uses of ESSER funding has likely prompted schools across Michigan to supplant some of their state and local funding with federal spending. Consider, as an example, a district that was planning to upgrade, repair, and improve a number of its facilities. Pre-pandemic, these one-time costs likely would have been financed through its general operating budget, perhaps over a multi-year period. Instead, with access to federal relief funds, this district can avoid tapping into ongoing state and local funds the district receives. By using this federal revenue on facilities, districts can direct the freed-up resources for other purposes or stash them into their savings account.

The Detroit Public Schools Community District recently announced its plan to use $700 million of its $1.2 billion COVID-19 relief funds on building improvements. Using the federal resources here will free up any general fund resources the district had previously programmed for capital spending.

From a financial management perspective, supplanting state and local spending with federal spending makes sense given the firm deadlines Congress set for the use of relief funds. Districts must obligate their first round of relief dollars received through 2020’s federal CARES Act by September 30, 2022, while funding from the second round must be obligated a year later. In contrast, there is no set timeline for districts to spend down their general fund reserves. This effectively provides districts with additional time to spend the federal grant resources.

Given the recent state and federal revenue increases, coupled with the growing budget surpluses discussed here, it is hard to avoid the conclusion that Michigan’s K-12 public schools, overall, are fiscally very healthy at the moment. While there is much work still to do to help students recover from the educational and other disruptions caused by the pandemic, it is clear that most public schools will have the financial resources to meet these challenges in the coming years.