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January 31, 2019

What Could Another Recession Mean for Public Education? A Look Back at 2008

MHT Partners  | Education Investment Bank

Following a three-week government shutdown, recent sluggishness in the markets and the longest economic expansion since the Great Depression, one cannot help but wonder whether an official downturn is on the horizon. Many economists are forecasting slower growth in 2019, but the question remains, will it morph into a full-blown recession? When it comes to recessions, we see business activity slow down, profits shrink and layoffs occur. What about the effects on public education, where the entire system is financed through public funds? Let’s take a look at the impact of the most recent Great Recession.

The Great Recession marked the only period in 50 years when education spending contracted nationwide. Spending went from $610 billion to $601 billion from 2010 to 2012* and did not exceed 2009 levels again for five years. However, the U.S. economy experienced other downturns since 1970, which indicates that a recession does not always affect education spending.

K-12 employment was also negatively impacted for the first time in several decades. The number of teaching positions grew initially through the recession but then declined by 3.5% on average from 2010 to 2012**. There was a clear impact to schools and districts, albeit delayed, but to a lesser degree than the broader U.S. which saw unemployment levels exceed 10%. Interestingly, K-12 employment was also unaffected in prior recessions. Despite annual enrollment increases for the past 30 years, the student-to-teacher ratio actually declined in the two prior recessions to 2018. That said, the nearly 380,000 teacher layoffs from 2010 to 2012 reversed the cumulative improvement in the student-to-teacher ratio since 1995.

When reflecting on these two notable events, it is clear that the greatest impact on schools and students occurred from 2010 to 2012, representing a noticeable delay from the effects felt by the general economy. How did that happen? It appears a couple of variables were at play. First, federal stimulus funds provided nearly $100 billion to the Department of Education with the purpose of delivering emergency funds to states. Nearly two-thirds of that money was awarded by late 2009 which then buffered education budgets through 2010. However, expiration and roll off of these funds by 2011 and 2012, respectively, were then felt throughout the education system. This delay was also influenced by tax revenues directed toward education by state and local governments. While state tax structures vary widely, they are driven primarily by sales and income, while local budgets are supported primarily by property taxes. Given the severe decline in the housing market in 2008, one might expect that property tax revenue would have suffered immediately. Quite the contrary, many school districts were able to offset declining property values by increasing property tax rates. Local governments have utilized this tactic in prior downturns, which is why property taxes serve as a remarkably stable source of revenue. Moreover, assessed property values often lag market values, which helps to support property tax revenues, at least initially. These two combined factors upheld education funding at the local level during the worst years of the Great Recession. However, the education market was impacted in an “echo fashion” and to a lesser degree than the broader market in 2010 and 2012 as school budgets tightened due to the ongoing decline of local tax receipts and without additional federal aid.

What are the lessons learned from the past? State and local governments have weathered many downturns and have some influence over the impact to budgets. At the same time, we saw the federal government step up in 2009 and earmark stimulus funds for education. That said, it would most likely take a recession as severe as 2008 in which public, corporate, housing values, and consequently, personal incomes all decline simultaneously and to such a degree that public funding for education is negatively impacted.

* NCES
** Bureau of Labor Statistics

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