Analysis: School Choice Improves Public School Funding

Published June 1, 2005

One of the most controversial aspects of school vouchers and education tax credits is their potential effect on public school finances.

On one side, critics charge vouchers will “drain much-needed resources from our public schools,” as Rep. Henry Waxman (D-CA) put it in remarks reported by The Washington Post. Since schools are mostly funded on a per-student basis, fewer students in public schools means less money in school budgets.

On the other side, choice supporters point to a growing body of research that finds exactly the opposite: Voucher and tax credit programs are a financial benefit to public schools.

Critics also talk as though their charges have been vindicated by fiscal studies. “Vouchers have been shown time and again to drain dollars from public schools,” Anne Bryant, executive director of the National School Boards Association, told the Associated Press last year. But what the research in fact shows is that enacting school choice would give the public school system exactly what it wants: more money to educate each student.

Schools Retain Excess Funds

Opponents claim school choice drains money from public schools so often that one may wonder how the opposite could possibly be true. The answer is simple: In a typical choice program, the amount of money spent on each participant is less than what would have been spent on that student if he or she had remained in a local public school. The excess funds can be plowed back into public school budgets and spent on the students who remain in public schools.

Projected Savings With School Choice Proposals
Location Public School Cost (per student) Proposed School Choice Cost (per student) Total School Choice Savings
Baltimore $8,900 $7,000 $9 million per year (before fixed costs)
Minneapolis $13,600 $4,600 $16 million per year (before fixed costs)
New Hampshire $8,100 $3,390 $9 million per year (after fixed costs)
New Mexico $8,500 $1,750 (average) $63 million over 10 years (after fixed costs)
South Carolina $8,300 $4,000-$4,600 $594 million over five years (after fixed costs)
Utah $6,500 $2,000 $26-$144 million per year (after fixed costs)
compiled by Robert C. Enlow

For example, a study by Susan Aud of the Milton and Rose D. Friedman Foundation and Vicki Murray of the Goldwater Institute revealed Arizona spends between $8,500 and $9,000 on each student in public schools. Under a proposal floated earlier this year that would have allowed students to use tax-funded private school scholarships worth up to $3,500 for K-8 students and $4,500 for high school students, the state would save thousands of dollars for each student who left a public school. The authors projected total savings of $32 million if 5 percent of Arizona students used scholarships.

In another study sponsored by the Friedman Foundation, this one of a proposed voucher program in Minneapolis, Ericca Maas found the city’s public schools spend $13,600 per student. Since the proposed voucher program would provide only $4,600 per student, the savings to state and local education budgets would be quite large. Maas projects more than $16 million in annual savings by the sixth year of the program if the maximum 5,000 students were to enroll.

Choice Programs Highly Economical

Even generous school choice programs almost never spend as much as their public school counterparts do. A joint study of the potential savings of a voucher program in Baltimore City, conducted by the Maryland Public Policy Institute and the Friedman Foundation, revealed that even a $7,000 per-student voucher, plus a generous 10 percent allowance for program administration, would save the city’s public schools money, since the city spends $8,900 on each public school student.

The report’s author, Dan Lips, projects $9 million in annual savings for every 1,000 enrollees. (See “New Jersey, Maryland Need School Choice, Studies Show,” page 6.)

Because voucher and tax credit programs provide fewer taxpayer funds for choice students than public school students receive, school choice saves state governments money.

Local Funding Remains

Do those savings in fact benefit public schools? You might think they would end up in the hands of state legislatures, which might choose to use them for purposes other than education. But in fact, because of the way school finance is set up, a large proportion of the windfall pours directly into local public school budgets.

While school districts typically get most of their budgets from state governments, a substantial portion comes from local taxes. This local funding, unlike state funding, isn’t provided to school districts on a per-student basis. The amount of local funding doesn’t change when enrollment changes; the pie stays the same size no matter how many kids are getting slices. When enrollment increases, public schools have fewer dollars per student, and when enrollment falls they have more dollars per student.

When a student uses a state-funded scholarship or tax credit to move from public school to private school, the local school district loses one student’s worth of state funding. But under most school choice plans, it continues to receive the same amount of local funding as before. Given that it has one fewer student to educate, its funding per student has gone up.

In Arizona, Aud and Murray found, of the $8,500 to $9,000 Arizona spends annually on each student (depending on grade level), between $4,200 and $4,600 comes from the state (again depending on grade level) and the rest from local taxes. That means every time a student leaves through school choice, the school district retains about half the funding associated with that student.

Fixed Costs Still Covered

When confronted with numbers such as these, the most common response of school choice critics is that the figures don’t account for costs that don’t vary much with enrollment levels, such as building maintenance. But recent studies show schools’ fixed costs aren’t nearly big enough to cancel out the huge savings from school choice.

Cotton Lindsay of Clemson University found that even after accounting for fixed costs, a proposed tax credit program for South Carolina (offering $4,000 to $4,600, compared to public spending of $8,300) would save $594 million over its first five years.

In a Utah State University study, Roberta Hertzberg and Chris Fawson examined a tax credit proposal for private school scholarships in Utah. They found the program would save between $26 million and $144 million every year, even after accounting for schools’ fixed costs.

Two Friedman Foundation studies by Senior Fellow Brian Gottlob confirm those findings. Gottlob found tax credit scholarships in New Mexico would save $63 million over 10 years. In a study cosponsored by the Josiah Bartlett Center for Public Policy, he found a proposed voucher program in New Hampshire would save $9 million annually.

Public Schools Keep the Money

“Because the state aid associated with each student migrating from public to independent schools is lower than the variable cost of educating each student in the public schools,” Gottlob wrote in the New Mexico study, “the migration of students to private schools will not financially harm school districts.”

Translation: When students leave via school choice programs, public schools benefit more from the reduction in their costs than they lose from the reduction in their funding. The state and the local schools save money, regardless of the fixed costs associated with educating a child.

It’s well known that private schools do a better job on smaller budgets than public schools do. Thanks to the efficiency that only a free market can provide, private schools offer not only an opportunity to give kids a better education, but also to save money that can be plowed back into the public school system.

Robert C. Enlow is executive director of the Milton and Rose D. Friedman Foundation.