5 Intertwining Financial Challenges Districts Are Facing

By Kaitlyn Chantry, Betty Chang, and Jonathan Travers

1. A Fraught Federal Funding Landscape

The Trump administration has sent a lot of signals that they’re looking to invest fewer federal dollars in public education: In March, Trump signed an order to close the Department of Education to the “maximum extent appropriate;” the budget proposal released in May included a reduction of $12.9 billion in federal funding; and for several weeks in July, the administration had frozen and then released $6.8 billion in federal grants that were earmarked for the coming school year. 

While the Senate Appropriations Committee voted down the Trump administration’s slashed budget proposal, too many factors are still up the air—and things are likely to shift more in the coming months. 

As we wait to see how Congress ultimately responds to Trump’s proposed budget, it’s clear that the administration would like cuts to be on the table. And these cuts would not hit all states equally. 

High-Need Schools and Students

As the impact varies by state, so too does the impact vary by district. By design, federal funding largely goes to high-need schools. Those schools—most of which are in high-poverty areas—will be hit the hardest should cuts occur. That means that it’s mostly economically disadvantaged students who are affected. 

And so, while federal funding makes up 5-20% of total education revenue across states, it can represent up to 20%—or more—of overall revenue for high-need districts. 

Even among similarly high-need districts, some rely more heavily on federal funding. Those that do will be more severely impacted, while their peers in states that rely more on state and local funding will be better equipped to weather a storm of federal cuts. 

As for individual students, so far there doesn’t seem to be a threat to Title I-A or IDEA, the two largest federal programs. However, some of the grants targeted by Trump’s budget proposal (and those that were frozen in July) support our most vulnerable students. Title I-C, which provides funding for families in transient occupations, and Title III-A, which provides funding to support multilingual learners, have both been in the crosshairs. 

The Medicaid Factor

The One Big Beautiful Bill Act, signed into law on July 4, 2025, includes changes to Medicaid that amount to a $911 billion cut to the program over 10 years. The most significant impact to schools will be the decrease in qualified participants due to work requirements, estimated to reduce Medicaid by $326 billion over 10 years. 

Why do these decreases in participation matter? Today, Medicaid covers nearly 30 million children. And school districts bill Medicaid for more than $7.5 billion in services for qualified families each year. These services include specialized transportation, care professionals, and school-based therapies that are associated with individualized educational plans (IEPs)—all structures and roles designed to support high-need students and students with disabilities.

If families currently receiving these services are no longer eligible for Medicaid, districts will no longer be able to receive Medicaid funds to cover those costs. Nonetheless, IEPs require schools to provide these services in many cases, whether there’s dedicated funding available to the district or not. As a result, a reduction in Medicaid reimbursement is effectively a cut to district budgets, as districts will need to use their general fund dollars to continue to pay for these mandated services and reduce investments elsewhere.  

SNAP and Universal Free Meals

The other direct impact of the One Big Beautiful Bill Act is the administrative changes to the Supplemental Nutritional Assistance Program (SNAP). As with Medicaid, many of the cuts to SNAP are coming in the form of more stringent work requirements. These new requirements are predicted to remove eligibility for 800,000 parents/guardians of children ages 7–18. 

Importantly, SNAP is used for direct certification so that students can receive free meals at school without going through a separate application and qualification process. A New Urban Institute analysis estimates that 832,000 students would have to revert to school meal applications as a result of the new legislation. 

Reduced enrollment in SNAP would also lead to direct funding decreases for districts that participate in the Community Eligibility Provision (CEP), which provides federal funding for universal free meals to all students enrolled in an eligible school. This federal funding is based on the number of SNAP-eligible students in each school, so a CEP funding cut due to reduced SNAP eligibility would impact at least 18 million students nationwide who are currently enrolled in these schools and benefit from universal free meals.

2. Strained State and Local Economic Conditions

As we know, school districts rely on a balance of federal, state, and local funding. But what happens when state and local budgets are further impacted by federal actions? This can result in a loss of state and local revenue overall, which means less money to go around. It can also mean that, unless states have a solid plan for raising revenue—which is a challenge in the current economy—they’re going to have to make tough budget decisions. In both cases, budgets are going to be tight.  

And tight budgets mean that state and local K-12 funding might get crowded out by other priorities. 

Economic Shifts

As the administration continues to solidify its plans for tariffs, tax cuts, and other actions that significantly impact the economy, state and local revenue is likely to be affected. Here are four ways that changes in the economy could impact state and local budgets: 

1. Decreased sales tax revenue: Rising costs and economic uncertainty have slowed down consumer spending, which, in turn, can decrease sales tax revenue. 
2. Decreased income tax revenue: Whether due to rising unemployment rates in 32 states or state taxes conforming to federal tax cuts, states are likely to see reduced income tax revenue. 
3. Decreased local property tax revenue: Many areas are experiencing declines in local property values, which decreases local revenue from property taxes. Property taxes are the main source of local revenue for public schools. 
4. Rising costs due to tariffs: State, local, and district budgets are likely to feel the impact of rising costs due to tariffs, as they will need to pay more for equipment, materials, and supplies. 

Filling in the Gaps

In addition to the trickle-down effect on state and local economies, states will have to find an answer for federal policy that has a direct impact on their bottom line. While it’s true that school districts will lose funds directly through decreases in Medicaid eligibility, states will also have to figure out how to make up for these cuts that are impacting residents across the board. 

One study suggests that nearly 9 million people will lose healthcare coverage through the Medicaid changes, with another study reporting that Medicaid spending will fall by $1 trillion over 10 years. States with large rural populations will be hit the hardest, with Louisiana and Virginia estimated to see a 21% reduction in Medicaid. 

Though less significant in total dollars cut, states will also experience an additional financial burden from the new cost-sharing model for SNAP. For the first time, states will have to pay for up to 15% of SNAP benefits. Under these new rules, that 15% represents more than $675 million for Illinois, $253 million for Oregon, and $1.9 billion for California if they don’t reduce their error rates by 2028.

If states want to ensure the health and care of their residents, they will need to find a way to make up for these massive cuts. The question, then, becomes: Will education budgets, programs, or initiatives be reduced to make up the difference? 

What the Past Teaches Us

While the specific challenges of this moment might be unmatched in public education history, this isn’t the first time states and districts have experienced funding cuts and economic downturns, and it certainly won’t be the last. 

During the Great Recession, which started in December 2007, per-pupil spending dropped by about 7%, according to a study published in American Economic Journal. While researchers are still pinning down the comprehensive impact of this decline in revenue, studies do show that students exposed to spending cuts generally have lower test scores and lower rates of college entry. What’s more, these impacts are even more drastic when factoring in income and race, with Black students and students from economically disadvantaged backgrounds experiencing lower academic outcomes than their peers following per-pupil spending cuts. 

The Great Recession also shows two important lessons on the relationship between economic conditions and public education dollars: 

1. State education budgets tend to get hit first and tend to get hit the hardest. 
2. Funding returns to K-12 education much more slowly than the economy recovers. 

Together, this means that, should all of the compounding factors impact state education budgets, we can expect a significant impact. And we can expect that it may take some time to return to previous funding levels. 

Source: C. Kirabo Jackson, Cora Wigger, & Heyu Xiong, “Do School Spending Cuts Matter? Evidence from the Great Recession,” American Economic Journal: Economic Policy 13, no. 2 (2021): 304-335. DOI: 10.1257/pol.20180674 

Also, don’t forget that during the Great Recession, federal funding increased significantly in an attempt to offset the loss in state and local revenue. Given the current administration’s attitude toward federal education funding, economic factors impacting states today and in the near future are likely to be problems that state and local governments need to solve on their own. 

3. Pervasive Enrollment Decline

K-12 enrollment hit an all-time high in 2019, with 50.8 million students enrolled in public schools across the country. Since then, however, enrollment has steadily declined. 

In fact, since the COVID-19 pandemic started in 2020, around 1.2 million students have left the public school system, reports the Reason Foundation. And the National Center for Education Statistics projects enrollment will fall even further to just 46.9 million students by 2031. That represents a staggering 7.6% drop. 

A new analysis by FutureEd confirms what many already suspect: The largest drop in public-school enrollment is among K-5 white students. 

Why Enrollment Decline Matters

Enrollment decline of this magnitude has a direct impact on districts—and students. Most notably, it represents a direct loss in revenue: Fewer students means fewer dollars. When coupled with funding cuts and economic distress, declining enrollment can seriously impact districts’ budgets—and, therefore, their ability to provide a high-quality education. 

At the same time, many districts are facing an even greater challenge playing catch-up, having delayed the “right-sizing” of their portfolio during COVID. In other words, though enrollment was declining in many districts even before the pandemic, once COVID arrived, district leaders were rightfully focused on addressing intensifying student needs and academic recovery. School closures and consolidation plans were put on pause. 

Aside from the direct impact on district budgets, enrollment decline also introduces the challenge of small, underenrolled schools, a complexity that’s worth diving into a bit more. 

The Unintentionally Small School

In the wake of enrollment decline, many districts are closing the smallest schools in their area. The Reason Foundation reports that 82 schools closed across 15 states in the 2022-2023 school year. In the 2023-2024 school year, 98 were closed. 

Indeed, most districts are seeing some of their schools become increasingly smaller. But there’s a difference between schools haphazardly becoming small—as often happens in the case of rapid enrollment decline—and leaders intentionally and strategically designing small schools. 

The former leads to high operational costs: An Education Resource Strategies (ERS) analysis found that small schools cost 20-30% more in per-pupil education. Spending more per-pupil dollars might sound like a good thing for kids, but the ERS analysis revealed that much of that spending typically goes toward fixed, recurring costs—not deliberate investments in student experience or research-backed initiatives known to improve outcomes. 

In fact, unintentionally small schools can sometimes make it more difficult to provide high-quality student experiences. When schools simply become small, students often lose access to arts programs, advanced coursework, electives, and more. 

The highest-need students also feel the greatest impact. In Los Angeles Unified School District between 2019 and 2023, for instance, enrollment in the highest-poverty schools fell by 15%, compared to 10% in the rest of the district.

How Did We Get Here? And What’s Next?

The reason for this extensive enrollment decline is multifaceted and may give a hint as to what district leaders will face in the near future: 

1. Falling birth rates: National birth rates declined by 14% between 2013 and 2022. This is the main factor that has been contributing to enrollment decline since 2008—and there’s no sign of this changing in the near future. 
2. Rise in school choice: While the school choice movement has been gaining steam for some time, the pandemic caused a sudden increase in parents seeking alternative educational options. Homeschooling, for example, has increased by 51% over the past six school years. Private-school enrollment has continued on a smaller, but steady increase. And with huge momentum around vouchers and ESAs, which provide incentives for enrolling children in private settings, this number is likely to go up. 
3. Migration/urban flight: Where families choose to live has an impact on whether certain states or certain districts experience more enrollment loss than others. From 2020 to 2022, more than 2 million people moved out of the country’s largest cities, leaving large metropolitan districts especially under-enrolled. And between 2021 and 2022, about 8.2 million people moved between states, with California, New York, and Illinois experiencing the largest losses. 
4. Immigration policy: New families arriving in the U.S. and sending their children to public schools has long been the primary source of increased enrollment. In 1990, for example, just 13% of students were children of immigrants, while in 2021 that number was 25%. That growth, however, has slowed. With the administration’s aggressive stance toward immigration, districts can expect continued stagnation. 

While districts may be able to predict trends in birth rates or even migration, it’s more difficult to estimate what the impact of immigration policies or school choice may have on their bottom line.  

Whatever the reason for the decline, it’s clear that enrollment loss will continue to create tangible reductions in revenue and force district leaders to reckon with unsustainable legacy cost structures that drain financial resources.

4. Rising Costs

While district revenue is under threat from federal cuts, economic conditions, and declining enrollment, leaders must also contend with ever-increasing costs. 

In part, this is again caused by the specter of unintentionally small schools. But under-enrollment is not the only contributing factor. Many rising costs are similarly rooted in legacy structures, ways of organizing school that build on “the way things have always been done.” 

While there are countless legacy structures that district leaders can and do tackle, we’re going to focus on three in particular that are having a major impact on districts today. All three meet these criteria: 

• The related costs increase independent of revenue. Even while a district is shrinking or losing money, these costs are going up. 
• The system or structure is disconnected from the district’s strategy and/or evidence of what works for students. 
• The financial impact is significant. These costs consume an outsized portion of the total operating budget, which also means that if district leaders don’t tackle these legacy structures, they’re going to have a hard time operating when faced with sizable budget reductions.

It’s important to note that tackling decades-old systems is enormously challenging: It can be time-consuming and politically fraught, and it can require upfront investments before you experience cost savings. This is the place where district leaders need the most support because as the world evolves, these structures are becoming more and more financially untenable. 

Outdated Teacher Compensation Models

The National Center for Education Statistics (NCES) reports that teacher salaries and benefits account for about 80% of the average school’s expenditures. But regardless of funding sources or revenue amounts, these costs—particularly benefits—have steadily risen in the past 50 years. 

Consider the time between the 2010-2011 and the 2018-2019 school years, for example. During that period, benefits (e.g., health insurance, retirement, unemployment) increased a whopping 23%, according to NCES. Teacher salaries, on the other hand, have risen much less—and haven’t even kept up with inflation. But even that small increase represents a fixed cost that requires an boost in district budgets—or a commensurate cut elsewhere—every year. 

Even if funding stays the same, paying annual cost-of-living adjustments when funding isn’t increasing accordingly can feel like a cut, and district leaders will have to find the money somewhere. 

Take North Carolina, for example. Teachers are paid based on a uniform minimum state salary schedule, regardless of whether their position is funded by federal, state, or local dollars. Some districts, like Winston-Salem and Guilford Counties supplement the state schedule with additional funds, but many are left with the uniform schedule alone. When the state increased salaries between 2023-2024 and 2024-2025 by an average of 2%, those raises applied to teachers in the federally funded Title I program. But federal Title I dollars remained largely unchanged from the previous year. 

So, while the state may have increased its budget to account for the rise in the state salary schedule, these funds might not be enough to cover the federally funded teachers. This leaves district leaders finding the funds in their own budgets—often making painful tradeoffs elsewhere.  

One final point: Most districts build cost-of-living adjustments into their salary schedules on a multiyear basis. While this can help recruit and retain teachers, it promises long-term increases without balancing future revenue. Even in the case of an unexpected decline in funding, districts are still on the hook for these salary increases. 

Where does this leave states and districts? The first step is to look at compensation structures to ensure they’re aligned with district priorities and research. Many districts operate in a traditional model, giving across-the-board raises across all steps and lanes, as well as awarding more money to teachers based on their experience and advanced degrees. However, studies have shown that teachers with a bachelor’s degree are just as effective as those with advanced degrees, thereby minimizing the ROI of such compensation increases. 

In more strategic models, leaders can restructure compensation models to pay great teachers more to teach where they’re needed most. This strategy helps retain strong educators, prioritize hard-to-fill roles, support early-career teachers, and reward your highest performers for taking on instructional leadership roles. Across-the-board increases, by comparison, are often less strategic and not targeted to student, school, or district needs.

Across-the-Board Class-Size Adjustments

Since the 2015-2016 school year, average class sizes have decreased by 3–5 students, driven in part by research that shows that individualized attention drives better student outcomes. While it is true that, in some cases, smaller classes mean improved student performance, the return on investment of many of these attempts to reduce class size has unfortunately been lower than expected. 

This is because, in legacy structures, districts often made across-the-board adjustments that incrementally reduced class sizes without linking these decisions to larger district designs. And these across-the-board class-size changes represent a large portion of total district spend. For instance, a district that reduced all class sizes by three students in recent years typically would’ve needed to increase their annual budget by 4.1% to cover teacher salaries and benefits for new hires—not including retirement/pension costs.  

As districts face increasing budget pressures, they will need to consider taking a more deliberate and strategic approach toward providing individualized attention for students, such as increasing class sizes for certain electives to maintain smaller class sizes in critical subjects like 9^th grade English language arts and math.

Increases in Special Education

In a recent ERS poll of district CFOs, respondents listed rising costs for high-need students as their number one concern for the upcoming year. And for good reason: At the same time that states and districts are losing funding, costs for special education are on the rise. 

Source: Results from a poll conducted at ERS’ CFO Strategy Networks Spring Convening (N=15)

Today, one in 31 children is diagnosed with autism spectrum disorder, and rates of students enrolled in special ed have increased by 1 million since 2021, projected to hit 8 million total by the end of this year. 

Special education represents a sizable portion of many districts’ budgets. It’s not uncommon for districts to spend up to 30% of their budget on meeting this need, even when state and federal funding designated for special education is much less. 

Take Massachusetts as an example. Between 2019 and 2024, total student enrollment in the state declined by 4%, but the proportion of students in special ed increased by 8%. That means that despite having less revenue coming in statewide, the state’s total per-student expenditures for special education have increased by 20%. 

And even as federal funding declines to a mere 12% for IDEA (compared to the 40% funding originally promised in 1975), and as districts experience other revenue losses, special education expenses still remain. 

Public school districts across the nation are committed to addressing this growing need: The question isn’t whether to service students enrolled in special education responsibly, but how. 

5. Greater Student Need

In many ways, growing, pervasive, and widespread student needs are the most important factor impacting districts today. Districts have a responsibility to prepare students with the knowledge and skills they need to succeed long term, but declining revenue and financial uncertainty impede their efforts. School leaders and teachers simply aren’t always provided with the resources they need to provide the high-quality education their students deserve. 

Post-Pandemic Student Outcomes

These challenges are coming on the heels of a national crisis in student outcomes that extends across traditional public schools, charter schools, and private schools. The COVID-19 pandemic exacerbated a decline in performance that had begun several years earlier. The most recent National Assessment of Educational Progress (NAEP) scores demonstrate that not only did performance drop, but gaps in performance increased.

Source: Lafortune, Julien, and Ugo, Iwunze. “Recent Test Results Show Widening Gap between High- and Low-scoring K-12 Students.” Public Policy Institute of California. https://www.ppic.org/blog/recent-test-results-show-widening-gap-between-high-and-low-scoring-k-12-students/

Since the pandemic, recovery has been slow:

• From 2021 to 2022, 8^th grade math scores dropped eight percentage points and the percentage of 8^th graders not reading at a basic level (33%) hit an all-time high in 2024. 
• Only 50% of 4^th grade students were reading on grade level in 2023, which is a three-percentage-point drop since 2019. 
• There are fewer 1^st through 8^th grade students placing on grade level in math now than there were before the pandemic, particularly in elementary school. 
• The gap between higher-performing and lower-performing students is widening: The lowest-performing students scored about 100 points below their peers in the 2024 NAEP. 
• NWEA Research projects that students will need about 4.8 additional months of education to catch up in reading and 4.3 months for math.

Social-Emotional Needs

For many students, growing needs extend beyond reading and writing. The Learning Policy Institute reports that social-emotional skill-building and well-being are more important than ever for our nation’s students. During the pandemic, 40% of students felt “persistently sad or hopeless”—and that number hasn’t improved much since 2022. Self-harm and suicide rates among youth are likewise growing. And for students from historically marginalized backgrounds, the current sociopolitical environment is layering on additional challenges.

While supporting student mental health and wellness has become almost an implicit mandate for districts, the expectation hasn’t come with additional funding. During the COVID-19 Pandemic, many districts used one-time ESSER federal funds to pay for social-emotional programs and positions like counselors and social workers. But with the expiration of those funds, many districts are faced with the responsibility of continuing to provide what are increasingly understood as necessary services without any additional funding to pay for them.

What Does This All Mean? Uncertainty Like Never Before

Creating more financial sustainability for districts and a better future for students takes serious planning and accurate forethought. 

But how can districts effectively plan given this overwhelming set of challenges?  

Earlier this year, we met with district CFOs from a number of large metropolitan districts. When asked about the best- and worst-case scenarios for change in revenue, leaders expressed some shocking expectations.

Imagine having to plan for 2026-2027 and not knowing whether your revenue will increase by 2% or decrease by 15%. The complexity of scenario-planning in such an environment is profound. And this, of course, assumes that the federal government delivers funding as promised and you aren’t faced with additional rescissions or unexpected impoundments. 

Source: Results from an activity done by district CFOs at ERS’ CFO Strategy Networks Spring Convening (N=15)

Any one of the five challenges that we named above would present a considerable obstacle for district leaders. Combined, you begin to see a picture of extreme uncertainty, with intensely competing priorities.

A Path to Progress

While these problems are big—and only getting bigger—they’re not intractable. We can’t predict the future, but we can prepare for it—and that starts by taking a good, hard look at the situation we’re currently in.  

Fortunately, history shows us that understanding the magnitude of the situation helps leaders make more informed decisions and collaboration makes change possible. As we move forward, SEAs, district leaders, and advocacy organizations can work together to help districts navigate the road ahead—all for the good of their students.

Learn more about what districts and states can do to meet this moment:

• When the Future Is Unclear, Start With What Matters Most. District leaders can get their arms around their financial situation and prepare for a potentially tumultuous budget season by aligning on a shared vision; taking an ROI approach to understand what to continue, stop, and scale; and dismantling legacy cost structures that no longer serve students. Learn about three essential actions for district leaders in this new publication.
• The Shifting Role of State Education Agencies in Supporting District Sustainability. State leaders can support districts by grounding their approach in data, creating greater flexibility to enable more agile district decision-making, and fostering strategic decision-making around resource use, including building awareness and capacity around the choices and tradeoffs that may be needed in the coming years. Learn about seven actions for state leaders in this new publication.

Looking for support navigating these intertwining financial challenges? Reach out for help!