The Challenges of School Reopening in the COVID-19 Era | Lord Abbett
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Fixed-Income Insights

Administrators face difficult operational decisions during the pandemic. What are the implications for school district finances?

Read time: 4 minutes

This article is from the forthcoming edition of The Muni Quarterly.

In the early days of the COVID-19 pandemic, public K-12 schools across the country closed their doors and shifted to remote learning. As the pandemic continues into Fall 2020, schools face ongoing challenges for the 2020-2021 school year. Despite these challenges, we believe the public K-12 sector is well-positioned to withstand the current operating volatility. Public school districts have typically had strong operational performance, and many have healthy reserves built up since the last economic recession. State funding represents only a portion of revenue for traditional public schools—they typically rely primarily on property taxes, which tend to be more stable.

Evolving COVID Environment Makes Planning Difficult, But Schools Have Responded Creatively

Many K-12 schools closed their doors in March 2020, with little advance preparation to shift to remote learning. School administrators engaged in planning over the summer months for a school year unlike any other. There are currently seven states, the District of Columbia, and Puerto Rico that have ordered partial or full school closures. In other states, the decision is often left up to the individual school district to determine if a school should reopen or offer remote instruction.

Schools took a creative approach to a difficult situation. Some opted for a hybrid approach—a mix of in-person and virtual instruction. Technological improvements helped to make virtual learning more palatable for students, parents, and instructors. School closures in Spring 2020 resulted in lower operating expenses, which helped school districts build up reserves. We believe full and hybrid reopening will result in higher expenses in Fall 2020, although we expect these costs will be manageable for most school districts.

 

Figure 1. Open and Shut: The State-by-State Status of U.S. Schools
Data as of October 12, 2020

Source: “Map: Where Are Schools Closed?” Education Week, July 28, 2020 (updated October 12, 2020). Orders include public statements or actions from government officials. They may be subject to waivers or overridden by other officials. States with an order to provide in-person instruction may grant waivers to individual districts. Closure orders may include exceptions for small groups or particular populations of students. Hawaii, the District of Columbia, and Puerto Rico are one-district entities, and are treated as states for the purposes of this chart.

 

State Budgets: A Mixed Bag of K-12 Funding

During the early months of the pandemic in spring 2020, many state budget officers began revising their revenue projections sharply downward due to the expectation of much lower sales and income taxes. With lower revenue projections, state legislatures anticipated spending reductions to offset these lost tax revenues. However, states began to reopen in May, and their economies started to show improvement from the nadir in March and April. For example, the state of Michigan originally anticipated a $1 billion budget gap for fiscal year 2021, but higher-than-expected tax revenues and federal stimulus funds resulted in a budget deficit of only $250 million. The state had originally planned on possible funding cuts to public K-12 education, but instead the legislature passed a per-pupil funding increase.

Other states have taken a varied approach to K-12 funding for the 2021 fiscal year. Some states have had modest increases in funding, including Florida, Utah, and Michigan as noted above. Other states, such as Pennsylvania and Texas, have kept funding stable for the current fiscal year. On the other hand, Colorado has made K-12 funding cuts to the tune of over $600 million. California did not cut funding to K-12 schools, but the fiscal year 2021 budget included $11 billion in payment deferrals. California schools will eventually receive these state funds, but in the interim they will need to have a financing mechanism in the event of cash flow challenges.

We note that depending on the length of the pandemic and the severity of future surges in COVID-19 cases, some states may reassess their spending on K-12 education and could conduct mid-year budget adjustments.

K-12 Public Schools are Well-Positioned to Withstand COVID-19 Operating Challenges

Beyond state budget cuts to some K-12 schools, other risk factors include rising operating costs for personal protective equipment, providing technology and devices to remote students, and additional cleaning. Fluctuating enrollment could result in lower revenue, as state funding is typically provided on a per-pupil basis. If a K-12 public school does not reopen for in-person instruction, some parents may shift their children to competing charter schools or private schools or opt to home-school their children. Teacher shortages are another concern—early teacher retirements and leaves of absence have resulted in some schools being under-staffed, which can impact their ability to fully reopen.

In our view, K-12 public schools are well positioned to withstand these operating pressures posed by the pandemic. Earlier in the year, federal stimulus provided funding to states, which in some cases was passed on to public schools. In addition, many school districts have built strong reserves since the last recession and can draw down on these funds if needed. School districts also have varying ability to reduce expenditures and raise revenues, and we expect that most will take a combination of actions to manage state aid cuts.

Perhaps most importantly, property taxes are the primary revenue source for most K-12 public schools and tend to be very stable. In many parts of the country, rising home values in the years after the last recession resulted in growing operating revenues for school districts. Despite currently being in a recession, housing values remain strong in many markets, and most school districts’ property tax bases should remain steady. The percentage of state aid versus property tax revenue can vary widely across and even within states. In some states, there are equalization formulas that states set to ensure a pre-determined, per-pupil spending amount. If property taxes are collected at a level lower than the pre-determined, per-pupil spending level, some states provide additional funding to school districts to reach the pre-determined amount. Wealthy school districts are therefore less exposed to state funding cuts, although less well-off districts may face challenges if they have a higher reliance on state funding to offset lower property tax collections.

Looking Forward: Significant Uncertainty, but School Districts Will Weather the Storm

Reopening K-12 schools is critical for an economic recovery, and we believe there will be increased focus on this sector in the coming months. Going forward, a surge of coronavirus cases in the fall and winter could cause schools that have reopened to reconsider their approach. The American Academy of Pediatrics (“AAP”) recently released research[1] that found a rapid rise of pediatric COVID-19 cases over a five-month period of study between April and September 2020. The study found that less than 3% of COVID-19 cases reported the week ending April 23rd were pediatric. In the last 8 weeks of the study period, this figure had jumped to 12-15.9%—a surge that coincided with the reopening of K-12 schools. If community spread occurs, and case counts rise, schools that reopened may need to shift back to virtual instruction.

Positively, a shift to remote instruction could result in lower operating expenses, as we saw in Spring 2020, although risks to returning to fully remote instruction include potentially lower enrollment. Public school districts are well-positioned to withstand operating challenges with their high levels of reserves and generally stable tax base, and we will continue to invest in this strong sector.

[1]“American Academy of Pediatrics and Children’s Health Association Find Rapid Rise of Pediatric COVID-19 Cases Over 5-Month Period: Study,” services.aap.org, September 29, 2020.

 

IMPORTANT INFORMATION

This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

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The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

 

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