Balancing State and Local Power over School Districts’ Finances

Between March 2020 and March 2021, the federal government authorized an unprecedented $192 billion in relief aid for public schools (Lieberman 2021a). This aid was intended to subsidize new expenses related to the COVID-19 global pandemic and also to offset substantial shortfalls in school funding due to a precipitous drop in state sales and income tax revenue due to the pandemic (Johnson 2020; Lieberman 2021a; Lieberman 2021b). Although education funding in some states still had not fully rebounded from the 2008–10 Great Recession (Burnette 2020; Johnson 2020), when designing the 2020–21 stimulus packages, the Biden administration sought to apply lessons learned from the prior recovery, noting that state and local governments’ recovery had been longer and slower (Khalid 2021). For example, while school districts enacted severe budget cuts during and after the Great Recession, many were unable to balance their budget because the fixed costs of education are high (Bowman 2011). This triggered varying types of state involvement in districts’ finances, up to and including complete takeover by the state in some circumstances and the dissolution of the district in others.

These actions were most prominent in a handful of states, but all states have laws that enable them to intervene in school districts’ finances. These laws shape important governance relationships and allocation of educational resources, yet we know little about them. During and after recessions these laws become especially important as state interventions rise, and then they fade into the background as interventions retreat. This may be why research on this topic is relatively limited. However, policy makers and education stakeholders could benefit from a thorough understanding of these laws, which present dramatic consequences for districts in some states and may interact with other areas of education policy. For example, school districts that have been taken over have higher concentrations of students of color and low-income students (Schueler and Bleiberg 2021).

Our research was guided by the following questions: In what ways do state statutes provide the bases and means for state intervention into local school district finances? What patterns emerge among these state statutory provisions, and do they suggest a useful typology of state law? Additionally, does classifying and comparing states in this way reveal potentially suggestive correlations between a state's potential for fiscal intervention and other major areas of education policy? This policy brief thus identifies what potential state interventions into school district finances already exist across the country, which is a necessary foundation to understand which interventions a district could be subject to in the near future, and how states can both contextualize their policy approaches and best address districts’ financial conduct and fiscal challenges going forward.

To create this broad baseline, we systematically identified and analyzed 449 state statutory provisions, which together contain 1,068 individual potential interventions, and created a policy system in each state. Each potential intervention contains (1) a subject matter, the area of local fiscal decision making or action that the state's action targets; (2) a trigger, the specific local occurrence or status that enables the state to assert its authority; and (3) an enforcement agency, the authorized actor within state government. Patterns revealed include the following:

• States’ enactment of strong potential fiscal interventions is a relatively new phenomenon with a remarkably steep chronological curve.

• A handful of states authorize the majority of potential interventions.

• States’ potential interventions focus most heavily on providing technical transparency, oversight, and support such as planning or budget assistance; however, more intrusive and directive potential interventions follow closely behind, including state takeover.

• States clearly favor school districts’ specific acts, events, or omissions, such as an improper expenditure, as the primary type of trigger for potential intervention, rather than a district's status or condition, such as running a deficit.

• States often vest enforcement power in educational authorities, such as the state superintendent; but others task noneducational actors with enforcement, such as treasury.

We further explore individual states’ potential fiscal intervention policy systems by considering both their breadth—as indicated by frequency, or number of ways the state may intervene—and their depth, as indicated by intensity, or the invasiveness of potential state interventions. By combining these two measures, we propose a typology that enables comparison of policy systems between and among states. This approach also allows us to overlay our proposed typology with data about other areas of education policy. Preliminary correlations suggest that higher-intensity potential state interventions in local school districts’ finances are:

• Inversely related to the percentage of white students in a state (this is also true for higher frequency potential interventions);

• Related to below-average state effort in funding education, and to weak union strength; and

• Related to a state's charter school enrollment.

Despite the conventional wisdom that education is a matter for local control, states’ authority over education policy has grown over time—including states’ ability to intervene in districts’ finances. States formally express authority by enacting statutes; groups of related statutes form policy systems. Although policy systems are distinct from implementation, the two are inextricably linked: the terms of a system's design specify the structures through and circumstances in which implementation (here, actual intervention) may occur. Additionally, a system's design contains assumptions about the “problem” the policy seeks to address.

The relevant literature has two main branches. The first focuses primarily on the implementation of state takeover of school districts, the most extreme form of state intervention into a school district's finances and governance. Notably, Morel's work integrates a case study in New Jersey with analysis of the roughly 100 state takeovers of school districts that occurred nationwide through 2016 (Morel 2018). Morel built on Burns’s regime theory framework (Burns 2003), contending that understanding the political (dis)empowerment of black communities is necessary to understanding takeovers. This is consistent with Andersen's work in the context of municipalities (Andersen 2012, 2014) and findings about Michigan's racially disparate implementation of its takeover statute (Arsen and Mason 2013). Schueler and Bleiberg (2021) similarly note that studying takeovers is important largely because of the equity implications.

Furthermore, synthesizing the many case studies and analyzing all school district takeovers nationwide from the 1980s through 2016, Schueler and Bleiberg (2021) found no evidence, on average, that state takeover produces academic benefits for students in a district subject to takeover. However, takeovers have been found to generate increased financial stability (Bowman 2011), which dovetails with findings that, in Ohio, a state-required recovery plan helped a financially stressed school district return to a position of stability, although it also depressed housing prices while it was in place (Thompson 2016). Thompson further found that local governments’ responses to fiscal stress (specifically, whether they cut per capita or operating expenses) could have long-lasting effects (Thompson 2017). Considering other impacts, Thompson found that school board members in Ohio were voted out at a higher rate following a takeover than following lower levels of state intervention (Thompson 2019). This echoes findings that lack of state-local coordination hindered state-led reforms in Louisiana and Michigan (Mason and Reckhow 2017) and that the Detroit community expressed its resistance to takeover by filing multiple lawsuits (Bowman 2013).

The other branch of the literature presents innovative, largely proactive policy proposals. Ammar et al. (2005) proposed a warning system to monitor school districts’ financial health. White et al. built on this to develop an alternative approach for a state to monitor school districts’ fiscal stress (White et al. 2015a) and analyzed a specific proposed early warning system to demonstrate that it was unlikely to accomplish its goals (White et al. 2015b). Bowman (2011) analyzed the availability of federal bankruptcy for school districts in fiscal crisis (a matter of state law) and, concluding bankruptcy was an ill fit for the underlying problem, proposed an alternative federal approach to scaffold policy change at the state level. Importing policy in whole or in part from another context (policy borrowing), or implementing new policy, open up the possibility of learning from others’ experiences (Burdett and O'Donnell 2016). However, cautions from the neighboring literature about municipal fiscal crises are relevant: Sapotichne et al. (2015) emphasized that the solution (a particular type of state intervention) must be calibrated to the context of an individual state, and they noted that some states “incubate fiscal distress” by imposing spending pressure and restricting local ability to raise revenue. The same dynamics are at play when it comes to school districts.

While the literature contains rich, nuanced case studies analyzing the implementation and impact of specific policies and thoughtful policy proposals, what it lacks is the larger context of the universe of potential state action. To fill this gap, we create a broad baseline of state policy systems regulating school districts’ finances and detailing potential interventions—including, but not limited to, state takeovers. In doing so, we draw on related work analyzing municipalities. This work analyzes the role that states have played in severe municipal financial distress, together with states’ efforts to monitor municipal financial health, and it sets the stage for thoughtful, contextualized policy borrowing. Scorsone's (2014) work in particular strongly informed our approach: His close survey of 16 states with municipal fiscal emergency laws posits that a thorough understanding of state fiscal intervention policy requires attention to what local actions or conditions the state intervention seeks to address, by whom, when, and how. Other, similar work supports Scorsone's framework (Pew Charitable Trusts 2013 [revised 2016], 2015, 2016; Sapotichne et al. 2015).

Our research establishes a comprehensive baseline of state policy systems, while also enabling the identification of inter-state patterns and trends over time. We collected data by systematically searching each state's statutory code in Westlaw (westlaw.com), assessing identified provisions for inclusion in our data set, and coding each selected provision according to a defined protocol. (More detail about our methods is available in a separate online appendix that can be accessed on Education Finance and Policy’s website at https://direct.mit.edu/edfp.) The data are current as of 1 July 2017.

As table 1 shows, states permit a wide range of potential interventions. Although about 70 percent of states have 23 or fewer potential interventions each, Michigan and Rhode Island together authorize 234 potential interventions. More generally, six states (CA, MI, NJ, NV, PA, RI) each with 57 or more interventions, constitute half of all potential interventions. These states seem a geographically and demographically diverse group, although nearly all have struggled significantly in recent years with the problem of school districts’ fiscal crises. Thus, the spike in legislation in at least some of these states seems intertwined with state politics. Furthermore, Deep South and Midwestern states, especially those along the Mississippi River, are likely to have more potential interventions than Upper South, Northeastern, and Rocky Mountain states. This pattern may suggest that policy reflects regional political culture or dynamics, or that policy diffusion in these areas is concentrated regionally.

Each potential intervention has a subject matter—an area of local fiscal decision making or action that the state's action targets—which influences how the intervention can change the balance of power between the state and a district. Overall, potential interventions focus most heavily on providing technical transparency, oversight, and support; state involvement in these areas includes elements such as planning and budgeting assistance. However, more intrusive potential interventions involving governance, funding, spending, and personnel follow closely behind. In contrast, few states have authorized interventions addressing major costs such as contracts, including collective bargaining agreements; employee benefits, insurance or retirement costs or contributions; or property. The data show substantial variation in potential interventions within states: All but three authorize intervention into multiple subject matter types. This may relate to state fiscal and political climates, particularly those around public education, or to other historical-cultural characteristics, such as the degree of urbanization and income stratification, or a tradition of local control. Similarly, variation within states could be temporal, reflecting a changing balance of state-school district power over time and the accumulation of newer approaches alongside older ones.

The breadth and depth of potential state fiscal intervention policies are reflected in the kinds of triggers of state action, as shown in table 1. Clear triggers put school districts on notice of when they may be subject to state oversight. States clearly favor districts’ specific acts, events, or omissions as the primary trigger type, such as a school district's failure to file its budget properly. This trigger type is present in nearly 60 percent of all interventions, nearly three times as often as the next most prevalent type. Again, variation within states is high—of 48 states with two or more potential interventions, 45 use multiple types. The specific distribution of types within a given state may indicate varying levels of legislative activity around different policy approaches or experiences with districts. That said, a trigger based on a local district's specific act or omission—say, failing to file a financial statement in a timely manner—almost always results in a focused potential intervention aimed at obtaining compliance. On the other hand, if a district's status or condition triggers state action—for example, running budget deficits—potential interventions are usually more comprehensive and intrusive.

Finally, enforcement power, a defining feature of all law, may indicate whether policy makers view a problem as primarily financial or academic. Moreover, depending on a state agency's mission, capacity, and leadership, the selection of enforcement authority may largely determine the likelihood of effective implementation. States often vest enforcement power in educational authorities such as the state superintendent or state board of education. Still, some task wholly noneducational actors with intervention, from a state legislative agency to the state auditor. As usual, national totals cloak state variation, which may be due in part to how states organize their fiscal oversight and educational bureaucracies. Enforcement agency choices are especially state-specific because the same or similar agency names—for example, state auditor or legislative auditor—may mask significant differences in agency resources, mission, and enforcement approach. Many states nonetheless appear to recognize the singularity of educational governance and finance, with the possible exception of school districts’ fiscal distress or crisis.

This proposed typology shows that twenty-nine states (almost 60 percent) have what we label “Weak Intervention Potential” (low intensity, low frequency) because they allow for substantial local fiscal control, even in times of fiscal distress. The seven states with “Narrow Intervention Potential” have less than average potential intervention opportunities, but nonetheless authorize strong interventions if local fiscal matters sufficiently worsen. Twelve states with “Strong Intervention Potential” are statutorily prepared to intervene often and potentially to a great degree. Only New Mexico has what we call “Broad Intervention Potential” because the range of potential interventions is great, but the interventions would not diminish districts’ control much.

Perhaps as a legacy of local control, because of less experience with districts’ fiscal crises, or, as Morel (2018) contends, the politics of and interactions among race, state power, and urban contexts, most states have authorized a relatively light fiscal touch on their districts, leaving districts largely in control, at least until substantial fiscal distress arises. And even then, potential interventions may only be provided for on an ad hoc or sporadic basis.

To explore possible relationships between fiscal intervention and other key areas of education policy, we analyzed potentially suggestive correlations between groups of states in our typology and the racial profile of a state's public school students, charter school enrollment, percentage of effort in school funding, and teacher union strength. (The online appendix details our methodology.) The resulting preliminary correlations demonstrate that policy in this area may interact with policy in other critical areas. We offer the correlations we identified with many caveats, chiefly that other variables, more nuanced and properly controlled for, may better explain patterns we identified. Additionally, we want to be clear that these correlations should not be interpreted as causal.

First, the more a state's student population is white, the more hands-off state potential fiscal intervention policies are. Of the 10 states with 75 percent or more white students, nearly all (9) are Weak Intervention states (low frequency, low intensity). Of all Weak Intervention states (29), nearly three quarters (23) had more than 50 percent white students. Additionally, both states with fewer than 25 percent white students are high intervention states.

Second, states’ charter school enrollment is directly proportional to the intensity of states’ potential fiscal interventions. All seven states with no charter law in 2015 were Weak Intervention states. Of the states with lower charter enrollment (<1 percent to 4.9 percent), nearly all were low-intensity states. (States’ changes in charter laws since 2015 appear consistent with this tentative relationship.) States with 5 percent or more of students in charter schools constituted a disproportionately high share of states in the high-intensity states.

Third, states with a lower percentage of effort to fund K–12 education more often have low-frequency potential interventions. More low-frequency states (58 percent) were below the national average percentage of effort than high-frequency states (38 percent). Specifically, six of the seven Narrow Intervention (high intensity, low frequency) states ranked below average on percentage of effort, with 57 percent of them receiving the lowest rating.

Fourth, weak union strength and low-frequency potential intervention echo the pattern identified in percent of effort. Most significantly, 72 percent of the Narrow Intervention states rank below average in union strength. However, 52 percent of the Weak Intervention (low intensity, low frequency) states are in the bottom half of the union strength measure, compared with 41 percent of the Strong Intervention states (high intensity, high frequency).

The financial pressures on school districts attributable to the COVID-19 global pandemic make our comprehensive identification of potential state interventions in school districts’ finances and analysis of patterns among them particularly timely. We thus offer four recommendations for policy makers and stakeholders.

First, we suggest that policy makers and stakeholders develop (or maintain) a thorough understanding of their state's policy in this area. Although this recommendation is not controversial, we speculate that few policy makers and stakeholders have done this. The relevant provisions often are codified in unrelated portions of the state code, making it challenging to find all relevant pieces, much less understand them as a system. We suggest that school boards, superintendents, and district fiscal officers familiarize themselves with the concepts in this research and the information about their own state in table 1. We also suggest that policy makers repeal or amend obsolete provisions; enact legislation that compiles, clarifies, and systematizes relevant code provisions; and align policy instruments with policy goals.

Second, we suggest that state policy makers connect potential state interventions and fill in gaps to create systems of gradually escalating potential interventions, as these are thought to enable early, low-level, remedial intervention and thus head off later, more intensive, arguably punitive intervention (White et al. 2015b). For example, if a district is facing fiscal distress, such distress is identified early, and optional consultation with the state does not resolve the situation, mandatory consultation would follow; if that is not effective then the state would assume limited oversight (i.e., approving specific district decisions); if the situation still remains dire, state takeover may result. A gradual system is more likely to exist or be able to be created when intensity and frequency are roughly proportional, such as in the Strong Intervention States (high frequency, high intensity), or the Weak Intervention States (low frequency, low intensity). The Narrow Intervention states (low frequency, high intensity), which go from zero to sixty very quickly, and the Broad Intervention state (high frequency, low intensity), are unlikely to have such a system or be able to develop such a system from their current statutory provisions.

Third, we encourage policy borrowing and also underscore the caution from the municipal policy literature that the similarity of state context matters a great deal. To consider how similar another state's school finance context is to one's own, we suggest comparing not just per-pupil expenditures but also such metrics as the state's wealth per capita, percent of effort, percent of total state and local funding, and the proportions of total funding from state and local sources. Additional consideration might include school employee pension funding, school capital improvement funding, permissibility of charter schools, and union strength. National and regional organizations can lead the development of this contextual knowledge and facilitate effective policy learning and borrowing.

Fourth, we encourage policy makers and stakeholders to explore potential connections and interactions between this and other key areas of education policy. This recommendation stems in part from the correlations we have identified, not because they somehow imply any causal direction—they do not, and indeed cannot. They instead suggest associations of some nature and degree that may point to potential issues going forward, particularly given the history and politics around education policy. More specifically, our recommendation does not depend on whether or not further study reveals that invidious considerations, or any other particular factors, have contributed to the variance in state fiscal intervention policies. Rather, it is the consistency of even simple correlations in this area that could not be identified until this work, plus prominent findings in the literature (e.g., Morel 2018), plus the historical legacy of widespread racial discrimination in housing, employment, and education (e.g., Rothstein 2017; Sugrue 2005), that together counsels attending to the potential for disparate impact of fiscal intervention policy making and implementation on matters of racial and ethnic equity.

In sum, states take varied approaches to these complex policy questions. At its core, the baseline we have established identifies the balance individual states have created between state and local power over districts’ finances. This includes understanding how much power the state reserves for itself through its potential interventions, under what circumstances the state can engage in specific actual interventions, and who makes the call.

We are grateful for the feedback on earlier drafts provided by and helpful conversations with David Arsen, Robert Floden, Catherine Grosso, Patricia Hinchey, William Mathis, Barbara O'Brien, Eric Scorsone, Katharine Strunk, Alistair Stark, Craig Thiel, Kevin Welner, and anonymous reviewers; the assistance with database design provided by Barbara Bean and Scott Naegle; and the work of research assistants Kaitlin Klemp, Morgan Lear, and Andrea Chambers. An earlier version of this work was published as a research brief by the National Education Policy Center as “States’ Intervention in School Districts’ Finances” (September 5, 2019) and is available at: https://nepc.colorado.edu/publication/state-intervention. Dirk Zuschlag's participation in this research was supported by the Education Policy Doctoral Program at Michigan State University. Michigan State University College of Law also supported this research, as did the University of Queensland School of Political Science and International Studies.