Key Points:

• The design of the Education Savings Account (ESA) proposal in Oklahoma ensures that local school districts will have substantially more resources for the students they serve when some students access ESAs—because the districts retain all local tax funding, much of their federal funding, and 20 percent of state funding that had been used to educate students who are no longer in the public schools.
• Though there are substantial fixed costs in public education, there are also variable costs. In FY 2010, Oklahoma public schools spent $8,651 per student. Of that total, an estimated $5,947 per student are variable costs. The remaining $2,704 are short-run fixed costs.
• Under an ESA program, Oklahoma public schools would retain fixed costs plus a lot more when students leave via an ESA.
• If anyone suggests that all or most of the $8,651 that taxpayers spend per student are fixed costs, then the state of Oklahoma should not fund enrollment growth in Oklahoma public schools—because by that logic all or virtually all public school costs are fixed.

The public education establishment routinely argues that school choice programs, where the money follows the child, harm students who remain in public schools. They suggest that students who remain in public schools are worse off because there will be fewer resources available for their education once some children depart public school districts via school choice. That is, there will be fewer students and, consequently, fewer taxpayer dollars to cover the substantial fixed costs of running a school.

Instead, research shows that all forms of private school choice tried in the United States have led to improvement in academic outcomes for students who remain in public schools or have led to no effect on academic outcomes for students who remain in public schools. Thus, the evidence on academic outcomes is one-sided. Greater school choice does not harm academic outcomes for students who remain in public schools.¹

That said, education policy debates are often about money and who controls it. Given that reality, this policy brief examines the fiscal effects of a proposed school choice program on the budgets of local school districts in Oklahoma.

Specifically, I examine Education Savings Accounts (ESAs), which have been proposed in 2015 for Oklahoma families. An ESA allows parents to bank a portion of their child’s per-pupil funding and use it for private school tuition, online learning, tutoring, and other educational options. Students eligible for ESAs must have been previously enrolled in an Oklahoma public school for at least 100 days in the prior school year. Exceptions include children of military families and pre-kindergarten students. Children who qualify would receive an ESA equal to 80 percent of per-student state taxpayer funding if their parents chose an alternative to their local public schools. Local and federal funds are not included in the ESAs. As shown below, these design features ensure that this ESA proposal leaves more resources for students who remain public schools.

The fiscal effect of a school choice program on local school districts requires some analysis. The proper way to think about this issue is not whether public school districts have in the past reduced costs when students in large numbers left the districts for any reason. The issue is whether they are able to reduce costs when students leave. Evidence that school districts increased expenditures when the number of students they served significantly decreased does not necessarily mean that they cannot decrease expenditures when students leave. Perhaps they did not have to reduce expenditures when students left because one or more levels of government chose not to reduce taxpayer funding, so districts did not reduce expenditures.

The key question for this analysis is the following:

If a significant number of students left a public school district for any reason from one year to the next, then is it feasible for the district to reduce some of its expenditures commensurate with the decrease in its student population?

The answer that comes from analyzing the finances of large and small school districts that lost students is “yes.” In my research, I have discovered that both the large school districts and the small ones were able to reduce a combination of instructional and support expenses at a higher rate than the losses in students. Thus, these costs were variable, even in the short run.²

I submit a very cautious analysis in this brief. In the interest of creating an overestimate of fixed costs, I treated the following as fixed costs in the short run: expenditures on capital, interest, general administration, school administration, operations and maintenance, transportation, and “other” support services. Of course, if a significant number of students left a school district from one year to the next, some of these costs could be reduced immediately. While I treat these expenditures as fixed costs in the short run for the present analysis, all of these costs are variable in the long run. Public schools can make new strategic decisions in these areas in response to permanent changes in their student counts. Thus, after a few years of a new school choice program, when enrollment trends become apparent, all taxpayer funds devoted to K-12 education can “follow the child” to the schools their parents deem better.

All other cost categories—instruction, student support, instructional staff support, enterprise operations, and food service—were able to be reduced commensurately or more than commensurately than the reduction in students in each of the school districts analyzed in my research. The school districts experienced decreases in their student populations for non-school-choice reasons, and student achievement did not decline.

Average Fixed and Variable Costs in Oklahoma Public School Districts
Data on spending categories for Fiscal Year (FY) 2010 were reported by the state of Oklahoma to the National Center for Education Statistics at the U.S. Department of Education. These data can be found in table 208 of the 2012 Digest of Education Statistics. The number of students in Oklahoma for that year was 654,802, which is also found in that document.³

In FY 2010, Oklahoma public schools spent $8,651 per student. Of that total, I estimate that $5,947 per student are variable costs. The remaining $2,704 are short-run fixed costs.

Thus, Oklahoma public school districts spent on average $5,947 per student on instruction, student support, instructional staff support, enterprise operations, and food service. And, Oklahoma public school districts spent an average of $2,704 per student on capital, interest, general administration, school administration, operations and maintenance, transportation, and “other” support services. Based on these figures, 68.7 percent of spending in Oklahoma public schools can be thought of as short-run variable costs, while the remaining 31.3 percent are short-run fixed costs. In the long run, all costs are variable.

There are three important issues to keep in mind about this analysis.

First, if anyone suggests that all or most of the $8,651 that taxpayers spend per student are fixed costs, then the state of Oklahoma should not fund enrollment growth in Oklahoma public schools—because by that logic all or virtually all public school costs are fixed.

Second, there is strong evidence that the above analysis is an overestimate of short-run fixed costs. Specifically, school district administration grew dramatically in Oklahoma public schools according to data the state reports to the U.S. Department of Education. Using the time period available, FY 1998 to FY 2011, Oklahoma public schools increased employment in school district administration by 49 percent, while the number of students in Oklahoma public schools increased by only 6 percent. In my analysis, school district administration is treated as a fixed cost, a cost that does not fluctuate with workload. In Oklahoma public schools, school district administration employment increased more than eight times faster than its student population from FY 1998 to FY 2011.

If anyone suggests that fixed costs are more than $2,704 per student, then the state of Oklahoma should study why these “fixed” costs are increasing faster than the increases in public school students—if these costs were truly “fixed,” then they should not be increasing much at all as the number of students change.

Third, a premise of the analysis here is that public schools should retain $2,704 per student for a couple of years when that student has left to attend a school that his or her parents deem better. In what other walk of life does one get paid for customers one no longer serves? I am not aware of a single example.

The 2015 ESA Proposal for Oklahoma
There is a 2015 proposal to offer Education Savings Accounts (ESAs) to Oklahoma families. Specifically, children who qualify would receive an ESA equal to 80 percent of per-student state taxpayer funding if their parents chose an alternative to their local public schools.⁴

In general, as the idea has been proposed in Oklahoma, students eligible for ESAs must have been previously enrolled in an Oklahoma public school for at least 100 days in the prior school year. Exceptions include children of military families and pre-kindergarten students.

Students who were previously enrolled in an Oklahoma public school who move to an ESA clearly save public school districts money. Each of these students would have been receiving 100 percent of federal, state, and local funding if they had remained in a public school, but under the ESA program these students use only 80 percent of state funding—the districts retain the remaining 20 percent of state funding, all local funding, and much federal funding for students no longer enrolled.

Fiscal Effects of Education Savings Accounts on Local School Districts
Using the analysis described above, 68.7 percent of spending in Oklahoma public schools can be thought of as short-run variable costs, while the remaining 31.3 percent are short-run fixed costs. If school districts lose an average of more than 68.7 percent of total funding—federal plus state plus local funding—from students who access ESAs, then students who remain in public schools may have fewer resources available for their education.

Is it possible that the 2015 ESA proposal in Oklahoma would lead to more than 68.7 percent of federal plus state plus local funding per student leaving school districts as students accessed the ESAs?

State funding comprised 47.8 percent of public school funding in Oklahoma in FY 2010 according to the National Center for Education Statistics at the U.S. Department of Education (2012 Digest of Education Statistics, table 203). Thus, under the 2015 ESA proposal in Oklahoma, 80 percent of state funding would follow students into an ESA. This yields 0.478 * 0.80, or 38.2 percent of per student funding following students into an ESA—which is well below the estimate of variable costs per student. Thus, public schools would be retaining 61.8 percent of per student funding—for students they no longer serve. In this example, public schools would be retaining fixed costs plus a lot more when students leave via an ESA.

In other words, students who remained in public schools would have even more resources available for their educations when some students leave via an ESA—because public schools retain 61.8 percent of the funding dedicated to the students whom they no longer serve.⁵

To be clear, I am not advocating that less than 100 percent of taxpayer funding be placed in students’ ESAs. As a matter of principle, I believe the money—all of it—should follow the child to the school his or her parents deem best. When you stop using Dr. Jones as your primary care physician and decide to use Dr. Moran who you believe is a better doctor, does Dr. Jones continue to receive any—much less a majority—of your future health spending?

The free enterprise system has led to tremendous innovations and breathtaking increases in human well-being over the past 250 years. It would be highly beneficial to bring free enterprise to our K-12 education system by allowing parents to choose the best educational settings for their children.

That said, I understand that some costs are fixed in the short run, for a year or two or three. In the first few years of a new school choice program, it may make sense to allow public schools to retain some funding for students they no longer serve. However, in the long run, all costs are variable—and all taxpayer funds per student could be put into ESAs. Public school districts will make new strategic decisions on staffing and other items—as is done in all other enterprises—when their customer base changes.

Conclusions

1. ESA Design Allows Districts to Retain Funds for Students It No Longer Serves. The design of the Education Savings Account proposal in Oklahoma ensures that local school districts will have substantially more resources for the students they serve when some students access Education Savings Accounts—because the districts retain all local tax funding, much of their federal funding, and 20 percent of state funding that had been used to educate students who are no longer in the public schools. (Another design feature that ensures positive fiscal benefits for public school districts is that virtually all ESA recipients in grades K-12 must previously attend public school.)
2. Districts Retain Almost Twice Their Short-Run Fixed Costs. Under very cautious assumptions, Oklahoma public school districts will retain substantial funding well over estimates of fixed costs per student as some students access Education Savings Accounts. Specifically, my cautious estimate of average short-run fixed costs for Oklahoma public school districts is 31.3 percent of total per student funding—federal plus state plus local funding. Under Oklahoma’s proposed Education Savings Account program, public school districts would retain an average of 61.8 percent of funding for students they no longer serve. This retention of funds is about double my estimate for short-run fixed costs.
3. Districts Lose More Funds When Students Transfer to Other Public School Districts. The retention of funds by Oklahoma public school districts under this 2015 ESA proposal is more generous than the retention of funds they experience when students move between public school districts—because the ESA proposal allows districts to retain 20 percent of state funding for students they no longer serve.
4. All Costs Are Variable in the Long Run. In the long run all costs are variable and all taxpayer funds should follow students into their accounts if their parents choose to access an Education Savings Account.

This policy brief was prepared by economist Benjamin Scafidi (Ph.D., University of Virginia), a professor of economics in the Coles College of Business at Kennesaw State University and a senior fellow with the Friedman Foundation for Educational Choice. Dr. Scafidi has testified as an expert witness for the state of Georgia in school funding litigation. He thanks Paul DiPerna for helpful comments.

Endnotes

¹ See, for example, http://www.hks.harvard.edu/pepg/PDF/Papers/PEPG14_05_Egalite.pdf Also see, Greg Forster, “A Win-Win Solution: The Empirical Evidence on School Choice,” Friedman Foundation for Educational Choice, April 17, 2013, edchoice.org/winwin

² Benjamin Scafidi, “The Fiscal Effects of School Choice Programs on Public School Districts,” Friedman Foundation for Educational Choice, March 2012, http://www.edchoice.org/CMSModules/EdChoice/FileLibrary/796/The-Fiscal-Effects-of-School-Choice-Programs.pdf

³ Typically, state Department of Education public school spending data do not correspond exactly to spending data these same state Departments of Education report to the federal government. I use the state-reported data from the U.S. Department of Education because they allow an apples-to-apples comparison of spending across states. If anyone wishes to use more current data on Oklahoma to replicate the analysis in this brief, they should make sure their data source is consistent with the FY 2010 data used here. In particular, some state Departments of Education omit some spending when reporting data on their own web sites relative to what they report to the federal government.

⁴ For more information about ESAs generally, please see: Matthew Ladner, “The Way of the Future: Education Savings Accounts for Every American Family,” Friedman Foundation for Educational Choice, September 27, 2012, http://www.edchoice.org/Research/Reports/The-Way-of-the-Future--Education-Savings-Accounts-for-Every-American-Family.aspx. Information on Arizona’s experience with ESAs is available at: http://www.edchoice.org/Research/Reports/Schooling-Satisfaction--Arizona-Parents--Opinions-on-Using-Education-Savings-Accounts.aspx and http://www.edchoice.org/Research/Reports/The-Education-Debit-Card--What-Arizona-Parents-Purchase-with-Education-Savings-Accounts.aspx and http://www.nationalaffairs.com/publications/detail/the-next-step-in-school-choice.

⁵ There are two complications that must be considered regarding the above analysis. First, it ignores federal funding. Federal funding for local public school districts comes from many different pots and virtually all have complicated “hold harmless” provisions. That is, it is not clear that school districts lose much, if any, funding from all pots of federal funding when they lose students to other school districts or via an ESA. In FY 2010, Oklahoma public schools received almost $1,500 per student in federal funding—about 17 percent of funding per student (table 203, 2012 Digest of Education Statistics). Given the end of federal stimulus funding, it is likely that this amount is somewhat lower at present. It is worth mentioning that prior to the federal stimulus, Oklahoma public schools received about 12.4 percent of state funding from the federal government—just over $1,000 per student (table 173, 2009 Digest of Education Statistics). Given “hold harmless” provisions in federal funding, public school districts will retain most federal funding for students who leave via an ESA. Suppose that going forward, Oklahoma public schools retain $800 per student of federal funding when these students leave via an ESA. Using the above example, it would remain the case that Oklahoma public schools would be retaining well above fixed costs per student under the 2015 ESA proposal when students access ESAs.

However, there is a second complication. Taxpayer funding will now be going to military families and to families with pre-kindergarteners, for example, who may have sent their children to a private school even without an ESA. Considering the two complications together, even if a school district lost all federal funding for students who left via ESAs and if a significant percentage of ESA recipients were military families or prekindergarten students who would not have been enrolled in a public school even without an ESA, the ESA program will lead to even more resources for students who remain in public schools. For example, suppose public school districts currently receive 10 percent of their funding from the federal government. If they were to retain none of that funding for students who left via an ESA and 51 percent of ESA students (a) were military families or prekindergarten students and (b) would not have been in a public school if the ESA program did not exist, then public schools would still retain funds in excess of the cautious estimate of short-run fixed costs. Thus, there would be even more resources available for students who remain in public schools—even under these very implausible assumptions. Please note that at least some military, prekindergarten, or other students who access an ESA would have been enrolled in a public school if the ESA program did not exist. Therefore, these students would have been a cost to school districts if the ESA program was not present. And, federal funds tend to have complicated “hold harmless” provisions that limit losses of federal funding as school districts lose students—for any reason.

At least one Oklahoma educator has suggested that all ESA recipients would have been private school students without an ESA. However, students in grades K-12 who access an ESA must have been enrolled in a public school for at least 100 days in the prior school year under the 2015 ESA proposal—thus, it is unreasonable to assume that all (or even many) of these students would have attended a private school without an ESA.