Going Bold, Not Broke, in Oklahoma: Education Savings Accounts

A common critique often put forth by school choice opponents is that such programs will divert students from districts, therefore “siphoning” resources from public schools. Opponents of the proposed Oklahoma education savings account program are no different.

The executive director of the Oklahoma State School Boards Association recently wrote an opinion expressing this concern, claiming that “vouchers won’t save public schools money.” First, there is a distinctive difference between school vouchers and education savings accounts (ESAs). Putting that argument aside, I set out to examine the potential fiscal impact of HB 2949, an ESA bill that, before missing legislative deadline this week, could have granted educational freedom to most children in the Sooner State.

Based on data from the Oklahoma Department of Education (OKDOE), 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 impact of Oklahoma’s HB 2949 ESA program could have had on state taxpayers and school districts.

The overall net fiscal impact is defined completely by the difference between the amount of financial assistance afforded by the program to participating Oklahoma 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 would be diverted from public schools. There is a chance that some students eligible for the program (i.e. those in prekindergarten and kindergarten) who enroll in a private school via the program would attend a private school, even if the program did not exist.

After my calculations are complete, we’ll know the fiscal effect of such an ESA 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 the Oklahoma ESA Bill

Student Eligibility and Funding Restrictions

HB 2949 would have created education savings accounts to assist Oklahoma students with unique needs and/or financial challenges.

ESAs allow parents to receive a deposit of public funds into government-authorized savings accounts to use on educational expenses. Those funds can cover private school tuition and fees, online learning programs, curriculum, private tutoring, educational therapies, college course costs, and even other higher education expenses.

Eligibility for Oklahoma’s potential ESA program is limited to students who are:

1. currently eligible to attend prekindergarten or kindergarten; or
2. enrolled in a public school where the student is being counted for funding purposes or was enrolled and counted for funding purposes during the most recently concluded school year if the public school is not yet enrolling students for the next school year; or
3. a new resident of the state; or
4. participating in or previously participating in the Lindsey Nicole Henry Scholarships for Students with Disabilities Program during the current or a previous school year; or
5. in the household of a member of the United States Armed Forces transferred from out of state or from a foreign country pursuant to a permanent change-of-station order of the parent.

The ESA will be funded in a stepwise manner as illustrated by the table below.

Table of income eligibility-based ESAs

I estimate 696,797 children, or 88 percent of all children between ages 3 and 18, would be eligible for an ESA. And because a nearly universal ESA program like this has been enacted only in Nevada (which is currently stalled in litigation), 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 at various participation levels (e.g. Costrell, 2010; Spalding, 2014).

Setting Up the Analysis

In order to evaluate the potential fiscal impact of the Oklahoma education savings account program on the state and school districts, I chose to consider the impact of $1 million spent on the program. The bill does not allow families to receive and use ESAs if their children are enrolled in public schools. For simplicity, I assume that each ESA is fully used to enroll a child in a private school or to customize an education 100 percent outside public district schools. We do not assume any portion of unused funds return to the state.

Below, I calculate the estimated average ESA amount and use that amount to determine how many ESAs $1 million would fund. Of that group of ESA users, we then must determine how many would be diverted from public schools and how many would have gotten their schooling outside the public system without financial assistance from the ESA program. That information will then allow us to estimate the fiscal impacts of the ESA program on the state and local school districts.

Calculating the Average Oklahoma Education Savings Account Funding Amount

The table above reported the average ESA amount for each eligibility group. I estimate the overall average ESA amount would be $3,878 based on the following weights:

• I assume 61.4 percent of ESAs will be awarded to students eligible for free or reduced-price lunch (FRL) programs (This rate is the same as the statewide FRL rate for all public schools in Oklahoma.);
• I assume 36.7 percent of ESAs are awarded to students from households that have income between 100 percent and 200 percent of the FRL income requirement (This rate is based on S. Census data that report the income distribution of Oklahoma households with children under 18);
• and the remaining 1.9 percent of ESAs would be awarded to students from households whose income exceeds 200 percent of the FRL threshold.

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

After estimating the average ESA amount, we can use that amount to compute the number of accounts that $1 million could fund. Dividing $1 million by the average ESA amount of $3,878 yields the number of accounts that can be funded: 258.

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

It is unlikely that all of the 258 students enrolling in the ESA program will be diverted from public schools because a subgroup of those students would likely enroll in a private school even without the financial assistance of an ESA. For instance, because students in kindergarten are not required to attend a public school for 100 days, it may be the case that some ESA users in pre-kindergarten or kindergarten would have enrolled in a private school without the program.

Although we do not know with certainty if and to what extent this will happen, I account for this propensity in the analysis.

To overestimate the number in this group, I assume the propensity to enroll in a private school is double Oklahoma’s private school enrollment rate, which would equate to 7.6 percent. Then, I rounded this figure up to 10 percent to reflect similar estimates from other fiscal work (see p. 11 of University of Arkansas economist Bob Costrell’s 2008 report).

From there, I multiplied that rate by the percent share of children enrolled in prekindergarten and kindergarten in public school (13.7 percent). (Remember, the bill has a prior-public-school requirement for children in all other grades.) That yielded 1.4 percent, implying that 1.4 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 258 ESA users, four prekindergarten or kindergarten students would have enrolled in a private school without financial assistance.

Therefore, of 258 ESA students funded by $1 million, 254 would be diverted from public schools. This group would provide cost burden relief to the state and school districts.

Calculating Fiscal Impact of Oklahoma 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 spending $4,982 to educate them.

Thus, the state will avoid paying $1.27 million for those 254 students, thereby more than completely offsetting the $1 million cost of the ESA program and saving the state $267,000.

Calculating the Fiscal Impact of Oklahoma ESAs on School Districts

A final, and crucial, determinant of the impact of an ESA program on local school districts lies in their variable costs.

Using financial data from the OKDOE, the estimate for short-run variable costs include categorical expenditures for Instruction, Student Support Services, and Instructional Staff Support Services. They exclude all other fixed and semi-fixed costs categories. Based on these data, about 56.7 percent of total costs per student are variable in the short run, implying that over 43 percent of costs are fixed or semi-fixed in the short run.

(Note that our estimate of variable costs is very cautious and excludes all fixed and semi-fixed cost expenditures such as all costs associated with Administration, Student Transportation Services, Enterprise Operations, Child Nutrition Programs Operations, Operation and Maintenance of Plant Services, Community Services Operations, all capital outlay, and Debt Service.)

The actual share of total costs that are variable is likely larger. In the long run, all costs are variable—a fundamental economic and accounting principle.

Based on this accounting, variable cost per student is $5,091. This represents 57 percent of total Oklahoma public school per-pupil spending of state, federal, and local funds.

If the funding diverted per ESA student was less than the average variable cost, then the average funding per student who remains in public school would rise—yielding a net positive impact. Under that 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 Oklahoma’s ESA program are:

• The total cost of funding $1 million worth of ESAs would be offset by $1.27 million in savings from students being diverted from public schools, resulting in a net positive state impact of $267,196;
• School districts would experience a reduction in state aid by $1.27 million;
• However, on average, school districts would also have $1.3 million in cost burden relief when students leave with ESAs, implying a net positive impact of $27,624 for the average school district for each $1 million spent;
• For context, Oklahoma public schools received more than $2.77 billion last year in state tax dollars, $469 million in federal tax dollars, and $1.25 billion in local property tax dollars.
• There would be little-to-no impact on federal revenue and no impact on local property taxes purposed for education because this program affects only state tax dollars. Property tax levies are set each year by local governments, and school districts have discretion only over levying for bond proposals and bond repayments. Local taxes are set independent of student enrollment, implying that enrollment fluctuations do not affect property taxes. Either way you cut it, public schools still keep at least most federal and all local education dollars even if they lose students (keep in mind these are students that these districts are no longer responsible for educating), further increasing the total funds they can spend per student still enrolled in their schools.

Notably, the $1.3 million savings to districts does not reflect a direct reduction in expenditures. Rather, it reflects relief from cost burden to teach ESA students, so districts will still have to make decisions about cutting costs in the face of enrollment declines.

Here is how all of our calculations look in a simple table:

Fiscal Impact Estimates for $1M in ESA Expenditures

Calculating Fiscal Impact of ESAs for Local Oklahoma 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, we expect fiscal impacts to vary by district.

The reason? 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.

For almost 80 percent of all school districts in Oklahoma, the average variable cost for each student diverted from public schools exceeds per-student state aid.

This is shown in the table below, which reports the following for each school district:

• average daily membership (ADM),
• total revenue per ADM,
• state aid per ADM,
• state aid as a percent of total cost,
• average variable cost (AVC), and
• the difference between AVC and state aid per ADM.

This final element is positive for 413 Oklahoma school districts and negative for 103 school districts. Even for most of the districts that receive the most funding from the state, the ESA program would have a positive fiscal impact. Of the 116 districts that receive more than half of their revenue from state aid, 41 would face a negative impact that averages $404 per student. In reality, because of hold harmless provisions, these districts would not be affected by the ESA program in the first two years.

Contrary to opponents’ assertions that it “drains” or “siphons” resources from public schools, this analysis shows how an Oklahoma education savings account program could instead offer a potential and welcome source of savings for school districts by increasing their flexibility to direct education dollars.

Oklahoma School District Costs and State Aid

For a full breakdown of every Oklahoma school district, see the table below. If you would like to contact the author for more information regarding these calculations, please comment below or email marty@edchoice.org.

1. The mechanics of school funding in Oklahoma are complex, and estimating the state foundation aid per student is no straightforward task.

To compute state aid per pupil, one must first calculate the state aid factor per weighted average daily membership (WADM). I used financial data from the OKDOE. I start with two components, the Foundation Aid Factor ($1,601.00) and the Salary Incentive Aid Guarantee Factor ($72.63). The State Aid Factor is obtained by multiplying $72.63 by 20 and adding this result to the Foundation Aid Factor. This yields $3,053.60.

I then multiply this amount by the WADM (1,123,016.13 for SY 2015-16), getting $3.429 million. Dividing this result by the (unweighted) Average Daily Membership (ADM) of 688,274.2 yields $4,982 per ADM. This is the base amount on which the ESA is determined. I’ll refer to this amount as average state aid. It should be noted that this amount, in practice, will vary by student as it depends on their individual characteristics (e.g. whether they have special needs, are enrolled in free and reduced-price lunch programs, etc.). It is simply not practical to account for every possible permutation (in terms of student enrollment and student characteristics) for this program. Instead, I will estimate “average” impacts on both the state and school districts.