The Great Recession offers insight about the impact the impending fiscal cliff will have on Ohio school districts

Some Ohio public schools may be headed for a world of hurt. They’ve been on a spending binge due to the massive $6.7 billion infusion of federal pandemic relief funds, and they’re facing a potentially devastating fiscal cliff when those funds run out during the 2024–25 school year.[1] If school leaders don’t plan wisely for the phase-out of these emergency dollars, student progress could suffer in the years ahead. And because the funds were distributed in a manner that awards more money to low-wealth districts, disadvantaged students are at greatest risk.

The purpose of the unprecedented federal aid was to help schools reopen safely and remediate student learning loss. But the dilemma facing many districts today is that they’ve used the temporary funds to take on long-term financial obligations, such as hiring new staff and raising educator salaries, that will be difficult to scale back when these dollars dry up. Indeed, some districts have taken on additional long-term spending when they should have been cutting expenses to address both long-term and pandemic-related enrollment declines.

The influx of federal funds has also significantly distorted district budgets, in that some districts have been so awash in money that they have little sense for the essential costs of running their schools and what they can afford. For example, over the last three years, Columbus City Schools has been awarded nearly $475 million dollars in federal Covid money, which is about half of the district’s pre-pandemic annual expenditures.[2] Even if Columbus City Schools has somehow maintained perspective on how to run a district within its means, getting back to a right-sized budget could be a shock to the system. The district’s May 2023 budget forecast mentions the impending “fiscal cliff” as a “significant risk,” specifically noting concerns about how to pay for 430 new full-time staff members hired using pandemic relief funds. This figure likely understates the excess staffing, as enrollment declines warranted cuts in district staff.

By now, all Ohio districts should see the fiscal cliff coming. The federal government made clear that these were emergency funds, not a permanent allocation, and budgeting experts and government officials have regularly warned districts about the approaching cliff. Ohio is also one of the few states that requires school districts to conduct and report multi-year financial forecasts, which forces districts to grapple with projected declines in future revenue. Sensing the coming storm, some districts are already cutting spending or putting tax levies on the ballot, hoping local taxpayers will bail them out by paying for some of their new, long-term obligations, such as increases in staffing and salaries. The Ohio General Assembly’s financial generosity in recent years will cushion some of the blow, as well.

Even if districts see the cliff coming, however, my research on the aftermath of the Great Recession—when federal American Recovery and Reinvestment Act (ARRA) funds eventually expired—suggests that the negative impact on student achievement will be significant if they don’t plan wisely.[3] Districts can make significant errors when forecasting future funding streams, even when they generate forecasts at the end of one school year about how much revenue they will have in the next year, just a few months later. That’s how uncertain school financial management can be. A surprise revenue shortfall due to an overly optimistic forecast requires districts that lack cash reserves to make sudden budget cuts that can disrupt district operations and student learning. Pandemic aid has significantly distorted district finances and make costly forecasting errors more likely after federal money runs out beginning in 2025.

The impact of such forecasting errors can be significant. My coauthor, Travis St. Clair, and I found that after federal stimulus funds ran out in 2012, every percentage point increase in unexpected revenue shortfalls led to a decline in student achievement of 0.02 standard deviations (about eight days’ worth of learning) among Ohio public-school students. For the average district that had an unexpected revenue shortfall (approximately 15 percent of Ohio districts in a given year), students lost about three weeks’ worth of learning relative to students in districts that spent a comparable amount per pupil but that did not make such a forecasting error. Predictably, these shortfalls corresponded to sudden cuts in staff and efforts to raise revenue with new tax levies on district residents.

The harmful disruptions documented in our study were not due to lower spending levels or the shock of the Great Recession itself. The negative impacts all occurred after federal relief funding expired after 2012—three years after the recession ended—because districts failed to accurately forecast changes in revenue. Students experienced achievement declines because districts unexpectedly had to cut spending all at once, as opposed to gradually reducing spending in anticipation of lower revenue in the future.

As one would expect, the large negative impact of budget forecasting error was particularly acute among districts with relatively low cash balances. Districts with cash balances below the median of 22 percent of annual operating expenditures—just over the sixty days of reserves at the top end of recommendations from the Ohio Department of Education and the Government Finance Officers Association—experienced large student achievement declines. Further analyses (which we did not publish) suggested that these districts continued to cut expenses in subsequent years—even in the absence of forecasting errors—as they sought to build up their depleted reserves.

Although it is easy to identify districts most at risk because they received the most federal aid (as a percentage of pre-pandemic expenditures) or experienced the largest enrollment declines, it is difficult to identify the districts most at risk due to low fund balances. One could use budget forecasts for fiscal year 2026 (FY26) to assess projected fund balances after pandemic funding is set to expire, but this wouldn't take account of planned tax levies meant to sustain current spending (e.g., the replacement of expiring tax levies). There’s also the possibility that districts might inflate costs or understate revenues if they look to secure voter approval for a tax levy. So looking at forecasted FY26 cash balances could vastly overestimate the number of districts at risk. Nevertheless, by my calculations using May 2023 financial projections, if no districts passed levies ahead of FY26 and if projected expenses are accurate (both of which are doubtful), then 140 Ohio districts will have cash balances of under 10 percent of expenditures or less and 224 will have balances of less than 20 percent of expenditures.

Districts tend to be conservative when forecasting revenues relative to expenditures, typically by a magnitude of 2–3 percentage points during the period of our study (2009–16).[4] It seems to me that all districts should err on the side of being even more conservative than usual in their budget forecasts for FY26 and FY27. Post-ESSER budgets are a “known unknown,” as our study clearly documents the negative impact of budgeting uncertainties after federal funding runs out. Districts receiving a lot of federal aid should assume that there’s a good chance they’ll get their forecasts wrong because of the distortions that relief funds introduce.

Although my analysis focuses on revenue shortfalls that Ohio districts didn’t anticipate, it’s important to reiterate that shortfalls are often entirely predictable and of districts’ own making. That’s because districts often lack the political will and strength to manage their finances such that necessary spending cuts occur gradually. For example, a district experiencing declines in enrollment might continue to run under-enrolled buildings as long as possible to avoid upsetting local stakeholders by consolidating schools. In the case of pandemic funds, they might be waiting for the post-2025 budget shortfall before closing under-enrolled buildings or laying off staff, as stakeholders might be less likely to punish them for the closures when it comes in the wake of fiscal stress. Such political expediency may save the district some controversy and the wrath of teachers unions—at least for a time—but it comes at the expense of kids’ learning and wellbeing. If done gradually and carefully, however, the closure of low-performing schools and the layoff of ineffective or unnecessary staff can even improve student learning.

Districts are likely making major errors in forecasting future revenues (a “known unknown”), and many have taken on financial obligations they know they can’t afford (a “known known”). The former requires conservative revenue forecasting to mitigate risk, and the latter requires that districts phase in spending cuts immediately to avoid the negative impact of making sudden larger cuts down the line. My research on Ohio districts in the wake of the Great Recession makes clear that students will suffer if districts fail to act accordingly. 

Stéphane Lavertu is a Senior Research Fellow at the Thomas B. Fordham Institute and Professor in The Ohio State University’s John Glenn College of Public Affairs. The opinions and recommendations presented in this editorial are those of the author and do not necessarily represent policy positions or views of the John Glenn College of Public Affairs or The Ohio State University.