The Fiscal Impact of Nevada’s ESA Program

This is the first in a two-part series on Nevada’s fiscal climate and educational choice.

A common critique often put forth by school choice opponents is that these programs will divert students from districts, therefore “siphoning” resources from public schools. Nevada is no exception.

Opponents worry that the state’s Education Savings Account (ESA) program will harm public schools financially (e.g. here, here, and here). Indeed, this argument even provides part of the basis for two lawsuits brought forth against the program. Fortunately, we can test these claims with publicly available financial data.

Based on data assembled from the Nevada Department of Education, U.S. Department of Agriculture, National Center for Education Statistics at the U.S. Department of Education, and the U.S. Census Bureau, I have estimated the net impact that Nevada’s ESAs will have on state taxpayers and school districts.

The overall net fiscal impact will be defined completely by the difference between the amount of financial assistance afforded by the program to participating Nevada families and the cost to educate students in public schools. It is also worth noting that this analysis does account for the likelihood that not all students will be diverted from public schools. There is a chance that some students eligible for the program (i.e. those in Kindergarten) who enroll in a private school via the program would attend a private school anyway if the program did not exist.

After my calculations are complete, we’ll know the fiscal effect of the program based on whether the final impact number is positive, negative, or neutral (zero). A positive impact implies a financial surplus is created for the state or school district. A negative impact implies that a financial deficit is created for the state or school district. A neutral impact implies the state or school district is made neither better nor worse off financially.

About Nevada ESA Program Student Eligibility and Funding Restrictions

For students with special needs and students from households with incomes up to 100 percent of the free and reduced-price lunch (FRL) program ($44,863 for a family of four), the ESA is equal to the statewide average basic support per pupil. This amount is $5,710 in SY 2015–16. For all other students eligible for the program, the ESA is equal to 90 percent of this amount.

We estimate 462,396 children, or 95 percent of all children between 5 and 17, would be eligible for an ESA. And because this is the first nearly universal ESA program ever, it is very difficult to predict with high confidence how participation in the program will play out, even in the near future. Although, we know school choice programs across the nation have been a source of savings to state taxpayers (e.g. Costrell, 2010; Spalding, 2014).

Setting Up the Analysis

In order to evaluate the potential fiscal impact of the Nevada ESA program on the state and school districts, I chose to consider the impact of $1 million spent on the program. Though families may use ESAs to purchase educational services  from both public schools and private schools, for simplicity, we assume that every ESA will be spent on private schooling services.

Below, we first calculate the average estimate for the ESA amount and use that amount to determine how many ESA accounts $1 million will fund. Of this group of ESA users, we then must determine how many will be diverted from public schools and how many would have attended a private school without financial assistance from the ESA program. That information allows us to estimate the fiscal impacts of the ESA program on the state and local school districts.

Calculating the Average Nevada ESA Funding Amount

We first need to estimate an average amount awarded for all ESAs.

Nevada’s Basic Support Guarantee per pupil for the 2015–16 school year is $5,710. This amount represents the ESA amount for students with special needs or students from households with incomes up to 100 percent of FRL. All other eligible students would receive 90 percent of this amount, or $5,139.

To date, 80 percent of students applying for the ESA program are eligible for the lower ESA amount. One reason for this may be that more affluent individuals tend to have better access (e.g. through stronger social networks) than less affluent ones. But, as more parents receive more information about the existence and details of the program, a likely case is that this share will converge over time to reflect the share of students with disabilities and FRL-eligible students we observe in public schools. Therefore, a reasonable and cautious approach to this analysis is to compute a proportionally weighted average for the ESA amount that reflects the public school population.

The rate for Nevada public school students enrolled in the FRL program is 53 percent, and the rate for students with disabilities is 12 percent. The weighted average ESA amount based on those rates is $5,509.

Calculating How Many Nevada ESAs $1 million is Likely to Fund

Once we estimate the average ESA amount, we can use this amount to compute the number of accounts that $1 million can fund. Dividing $1 million by the average ESA amount, $5,509, yields the number of accounts that can be funded, or 182 ESAs.

Calculating the Number of Nevada ESA Students Not Diverted from Public Schools

It is unlikely that all of the 182 students enrolling in the ESA program will be diverted from public schools because a subgroup of these students would likely enroll in a private school anyway, even without the financial assistance of an ESA. Because students in kindergarten are not required to attend a public school for 100 days like students in all other grades, it may be the case that some kindergarten ESA users fit that mold. Although we do not know with certainty if and to what extent that will happen, it is important that we account for it in our analysis.

To cautiously overestimate the number in this group, I assumed the propensity to enroll in a private school is double Nevada’s private school enrollment rate (5.5 percent), or 10.9 percent. Notably, this estimate is similar to other fiscal work (see p. 11 of economist Bob Costrell’s 2008 report).

From there, I multiplied 10.9 percent by the percent share of children enrolled in kindergarten in Nevada private schools (12.1 percent) to estimate the number of students in the ESA group who would be diverted from public schools. This yielded 1.3 percent, implying that 1.3 percent of all ESA users would likely have attended a private school without the program in place. It follows that out of the group of 182 ESA users, three kindergarteners would have enrolled in a private school without financial assistance.

Therefore, of 182 ESA students funded by $1 million, 179 would be diverted from public schools. This group will provide cost burden relief to the state and school districts.

Calculating Fiscal Impact of Nevada ESAs on State Expenditures

Having determined how many students will be diverted from public schools among ESA recipients, we can estimate the impact of the program on state expenditures.

For each student diverted from a public school, the state avoids paying, on average, $2,560. (This figure is based on data reported in the FY 2015 NRS 387-303 Report. It is the portion of basic support funds that are provided by the state.)

Thus, the state will avoid paying $458,000 for those 179 students, thereby offsetting the $1 million cost of the ESA program by almost one-half.

Calculating the Fiscal Impact of Nevada ESAs on School Districts

A final, and crucial, determinant for the impact on local school districts lies in their variable costs.

Using financial data from the Nevada Department of Education, our estimate for variable costs include categorical expenditures for Instruction, Student/Instruction Support Services, Other Support Services, and Fringe Benefits. They exclude the following fixed and semi-fixed costs categories: Total Operational Expenditures, Total Property Expenses, Assets/Reserves, Debt Service, Transfers, and other miscellaneous expenses.

Based on this accounting, variable cost per student is $6,453. This represents just under half of total Nevada public school per-pupil spending (less ESA transfers) of state, federal, and local funds. Keep in mind that is an underestimate of variable per-pupil costs.

If the funding diverted per ESA student were less than $6,453, then the average funding per student who remains in public school would rise—yielding a net positive impact. Under such a scenario, students diverted from public schools would result in savings for a district, provided the district actively adjusts costs as its student enrollment changes. If the two values were equal, then the district would incur a fiscally neutral impact.

To sum up, I estimate the following fiscal impacts for each $1 million spent on Nevada’s ESA program are:

• The total cost of funding $1 million worth of ESAs would be offset by $458,240 in savings from students being diverted from public schools, resulting in a net negative state impact of $544,469.
• School districts will experience a reduction in state aid by $458,240.
• However, school districts will also have $1.2 million in cost burden relief when students leave with ESAs, implying a net positive impact of $696,860 for school districts for each $1 million spent.
• There will be no impact on local property taxes purposed for education because this program affects only state tax dollars and because enrollment fluctuations are independent of property taxes.
• For context, Nevada public schools received more than $1.6 billion last year in state tax dollars, $414 million in federal tax dollars, and $2.5 billion in local property tax dollars.

Notably, the $1.2 million savings to districts does not reflect a direct reduction in expenditures. Rather, it reflects relief for schools and school districts from the cost burden of teaching those ESA students. So districts will still have to make decisions about cutting costs in the face of enrollment declines.

They could cut spending or redirect spending to other areas in their budgets. Indeed, there may be other areas in their budgets where school districts could (and may be likely to) direct those funds—the growing costs of retirement benefits provides one major area, which I will discuss in a future blog post.

Here is how all of those calculations look in a simple table.

Summary: Fiscal Impact of Nevada ESA Program from Funding $1M in ESA Expenditures

Calculating Fiscal Impact of ESAs for Local Nevada School Districts

The above discussion estimates the fiscal impact on the “average” school district. Because school funding streams don’t flow to school districts in an even manner (see columns E-G in table below), we expect fiscal impacts to vary by district.

The reason is some districts receive the vast majority of their revenue from the state while other districts rely heavily on property taxes. As long as variable costs exceed the reduction in state aid for each diverted student, the district will incur a positive fiscal impact.

The table below shows that for all but two school districts in Nevada, the average variable cost (column C) exceeds the state aid they receive for each student (column F). This indicates that the ESA program would have a positive fiscal impact for these districts.

Even for those districts that receive a disproportionate share of funding from the state, e.g. Churchill, Mineral, and Pershing, the ESA program will have a positive fiscal impact. No districts would incur a negative impact.

Expenditures and variable costs by school district

Contrary to opponents’ assertions that Nevada’s ESA program would “drain” or “siphon” resources from public schools, this analysis shows how it can instead offer a potential and welcome source of savings for school districts by increasing their flexibility to direct education dollars. Given the state’s current fiscal climate, it may very well benefit the Silver State to embrace educational choice policies that partially mitigate its financial challenges, even if by modest amounts.

Like many states around the country, Nevada’s public retirement plan also creates external fiscal constraints on school districts’ budgets, and the ESA program could potentially loosen those constraints.

The next entry in this series will discuss Nevada’s pre-ESA fiscal climate in detail.