Competing Forces Complicate State Education Funding

This is one in a series of five articles examining key debates that will unfold in the nation’s statehouses in the year ahead.

Debates about how to approach public school funding are reaching a boiling point nationwide. Although the pressures have been building for years, the $190 billion in Elementary and Secondary School Emergency Relief (ESSER) Program funding from the federal government and the wave of state tax revenue have masked the difficulties surrounding K-12 funding.

Now in 2025, most of the federal aid tied to the COVID-19 pandemic has expired and many school districts are dealing with budget deficits. And—following a slowdown in tax revenue—states are tightening their belts. Meanwhile, enrollment rates, part of the calculation of district funding, are stagnant and still below pre-pandemic levels, even as demand for additional education spending grows and interest in alternatives such as school voucher programs increases.

These competing forces are expected to start coming to a head in this year’s legislative sessions, and policymakers are revisiting their states’ school funding formulas and considering other courses of action.

Reexamining funding formulas

Declining enrollment, rising staffing and administrative costs, and increasing numbers of students with additional educational needs are increasing pressure on traditional state funding formulas.

During the pandemic, many states enacted "hold harmless" policies to maintain existing levels of school funding despite declines in enrollment on the assumption that many of those students would eventually return. However, these policies are expiring, and enrollment has not recovered from the sharp declines in 2020. In the meantime, student needs, such as those covered in individualized education plans (IEPs) and other learning accommodations, have increased demand for special education-related spending that might not be entirely covered by current funding parameters. As a result, several states are revisiting their school funding formulas.

Oregon’s current formula caps special education funding tied to IEPs at 11% of students statewide, even though the share of students with IEPs has grown to 15%. This means that schools are implementing specialized learning plans plus additional support, such as individualized instruction and adapted equipment, for about 20,000 students statewide without additional funding to do so. The state kicked off the longer process of overhauling its funding formula earlier in 2024, and the governor’s office opened conversations with K-12 stakeholders to identify more immediate solutions in the interim.

Oregon’s funding gap for special education services mirrors the national average. From fiscal 2001 through fiscal 2023 (the most recent year of data available), 41 states saw higher percentages of students in need of special education services. In fiscal 2022, per-pupil spending increased 1.8% nationwide from the prior year, with the average rising to $15,591.

In Alabama, lawmakers are deliberating whether to update the state’s 30-year-old funding formula to a weighted student funding model, which would take student needs, such as English being a second language, into account. Krista Kaput—a senior analyst with the education nonprofit Bellwether, which is working in Alabama with a local group, A+ Education Partnership—said states should revisit their formulas every few years. "I don’t think continuous improvement is a bad thing," she said in an interview with Pew. "A state shouldn’t pass a formula and say, ‘That’s it, we’re done.’"

But Alabama isn’t the only state with a student funding model older than many of its teachers. In Virginia, where K-12 spending makes up about 30% of the state budget, legislators are looking to update the funding formula for the first time since the 1970s. In 2023, the Joint Legislative Audit & Review Commission found that the state’s formula systematically underestimates the number of staff needed by 51%. The state is also still relying on cost-saving measures in the formula implemented during the Great Recession.

Delaware, which has faced multiple lawsuits regarding equity disparities in its funding system, passed a resolution in 2024 requiring the Senate to convene a committee to review recommended changes to the state’s formula and present them to the governor in the fall of 2025.

As policymakers grapple with these more immediate questions, the question of declining enrollment still looms over all long-term conversations. Even as per-pupil spending and other cost drivers increase nationally, enrollment has been on a downward trajectory, a trend that can create larger issues for school funding that may not be fixable with a formula change.

Until now, the ESSER funds and an unexpected surplus of state tax revenue have helped to steady education coffers. As states look to revamp their funding policies, policymakers will need to consider how to effectively address expanded pupil needs with fewer resources. To come up with effective approaches, good data will be essential. For example, Kaput said, states could provide school districts with detailed population projections to help them manage future enrollment declines.

Lower enrollment is driven in part by the decrease in the nation’s fertility rate, which has been falling steadily since 2007. "The rate at which [birth rates] have been declining may not register as a lot, but that amount could actually be catastrophic for schools," Marguerite Roza, director of the Edunomics Lab at Georgetown University, said in an interview.

But fewer children is just one part of the public enrollment picture. According to the Urban Institute, roughly 40% of the national enrollment decline of 1.2 million from 2019 to 2022 was a result of students entering private schools or being homeschooled.

A shift away from public school

Pandemic era disruptions—most notably schools’ inability to provide in-person instruction—led many families to opt out of their public schools. These disruptions helped spur an expansion in private school choice initiatives as families searched for alternatives to meet their children’s needs. The popularity of these initiatives continued even as the impact of the pandemic waned.

Private school choice policies provide state funding through vouchers, tax credits, or education savings accounts (ESAs) for families to pursue options beyond their children’s assigned public schools. Over the past three years, the expansion of ESAs—government-authorized savings accounts that families can use to cover portions of private school tuition or homeschooling costs—has been on the rise. These programs have existed since the 2010s, but the funds have typically been reserved for students from low-income households, with special needs, or in low-performing school districts. More recently, however, several states have moved to expand eligibility and remove means testing, often to cover all students, including those already enrolled in private school. These changes usually result in higher program costs, especially if spending is left uncapped.

Twelve states have recently enacted legislation that provides universal eligibility for private school choice programs, including ESAs, part of a wave of at least 25 states that have passed new private-school choice laws since 2022.

Debates over school choice policies—and their cost—continue to loom large. For example, Tennessee state legislative leaders and Governor Bill Lee (R) are pushing a universal school voucher proposal for the second year in a row. Supporters of private school choice are expected to push for expanded programs in Utah and Indiana, while failed 2024 initiatives may be reintroduced in Texas and Mississippi.

In Louisiana, the state’s newly created universal ESA program, LA GATOR, will launch in August with limited eligibility and will phase in to full implementation by 2028. The state’s Legislative Fiscal Office (LFO) projects that the program will have a minimum $258 million annual price tag once it ramps up to full eligibility. But the LFO also warns that the full financial costs are "difficult to project" because of uncertainties that, opponents say, could lead to expenses ballooning quickly. Moreover, the program is an added cost in a year when the state must also contend with looming deficits and potential education cuts.

In Arizona, the first state to implement a universal ESA program in 2022, officials are navigating the country’s first full-scale implementation. The program has proved more popular than expected, driving up anticipated costs. Governor Katie Hobbs (D) proposed restricting eligibility to students previously enrolled for at least 100 days in public schools in the fiscal 2025 budget proposal, citing estimated savings of $244.3 million. Lawmakers rejected the governor’s proposal, and did not place any caps on ESA enrollment. This year will provide more clarity on costs and enrollment trends.

Other states that recently implemented universal ESA programs, such as Arkansas, Florida, and Iowa, will also gain a clearer understanding of their programs’ affordability in 2025. Although ESA programs are often not directly linked to K-12 education funding, they add fiscal pressure—alongside rising Medicaid costs, child care initiatives, and tax cuts—at a time when budget resources are increasingly constrained.

Looking ahead

Increased federal funding and tax revenue provided a temporary fix for increased demand for learning services from policymakers and parents alike. But as funding sources have dwindled, legislators are turning to a slate of options that includes reevaluating funding formulas, cost balancing, and public funding for nonpublic options.

In Colorado, for example, the budget for fiscal 2026 proposed by Governor Jared Polis (D) would slow the phase-in of the state’s new funding formula, shifting the timeline to seven years instead of six to better manage costs as the state faces a budget gap. Like other states, Colorado must figure out how recent property tax cuts will fit into the overall funding puzzle. On top of the projected budget woes, the state is now required to backfill $188 million in lost revenue over the next two years after passing the property tax cuts.

Beyond the demand for increased services and expiration of ESSER funds, school districts must still contend with pandemic-era challenges, such as increased technology expenses and the loss of children who have not returned to the public school system.

With districts facing looming funding cuts and already planning school closures linked to weakening enrollment, states face a perpetual cycle of right-sizing school districts and funding formulas, in addition to balancing increased demand for nonpublic options. Additionally, President-elect Donald Trump's campaign promises of providing universal school choice and eliminating the federal Department of Education—though politically difficult—add uncertainty to future funding levels and initiatives in states. School districts across the country are preparing for potential cuts in federal education funding, which makes up about 10% of current K-12 budgets.

As legislators look to the next decade, they cannot afford to address only the short-term issues but also must consider how current funding formulas and school choice programs fit into the future of K-12 funding. Projected enrollment declines further jeopardize the existing system and will underscore all policy conversations.

Doing so in a time of increased resource constraint will be difficult. "This upcoming period," warns Georgetown’s Roza, "is the first time many legislators are going to have to face K-12 cuts."

Alexandre Fall and Page Forrest are senior associates with The Pew Charitable Trusts’ Fiscal 50 project.