Connecticut’s teachers may be better off with a 401(k) style, defined contribution retirement plan than under Connecticut’s massively underfunded pension system, according to some number crunching. Assuming a 6.5 percent employer match and adjusted for inflation, a defined contribution plan could yield similar retirement savings to that of the existing ...
Education Savings Accounts: Empowering Kids and Saving Money in Connecticut
**For full charts, graphs, and citations please download the PDF**
It sounds almost too good to be true – there is a way both to improve opportunity for our state’s children and save money. Education Savings Accounts (ESAs) are an innovative way to increase options for parents and their children, while ensuring that each child in Connecticut has access to a school that will best fit his or her individual needs.
It is clear that we will have to do more with less for Connecticut’s schoolchildren in the coming years. How do we spend taxpayer dollars in a way that is responsible and still helps children achieve to the best of their abilities? ESAs provide an excellent vehicle to increase parent choice, open access and opportunity for more children, and still maintain funding for local schools.
In an effort to demonstrate how ESAs can improve Connecticut’s education landscape, Nonpartisan Action for Better Redding (NABR) and Yankee Institute have partnered to produce this new study, analyzing how Education Savings Accounts (ESAs) could benefit both municipalities and our state as a whole. Although ESAs are hardly a panacea for all of Connecticut’s problems, they do promise both to improve equity and save millions of dollars – and most importantly, offer the opportunity for children across our state to achieve their full potential.
David Bohn, Nonpartisan Action for a Better Redding & Carol Platt Liebau, President of Yankee Institute
Few states in America currently confront as many difficult challenges across so many policy fronts as Connecticut.
- In September of 2016, Superior Court Judge Thomas Moukawsher issued his surprise opinion in the case of CCJEF v. Rell, an 11-year-old lawsuit that had sought increased subsidies for the state’s worst performing schools. But rather than ruling that public- school funding is inadequate, the judge ordered the Connecticut legislature to completely revamp the state’s K-12 system with a special emphasis on helping poor, minority, and learning- disabled children.
- More recently, Connecticut’s legislature found itself grappling with budget deficits made worse by an unexpected 12-14% drop in projected revenues and the nation’s second-worst-funded teacher pension plan. With high earners and corporations fleeing ever-steeper taxes and a regulatory environment that discourages entrepreneurship, policy makers are struggling more than ever to manage state finances.
- Adding to these two problems, many of the remedies proposed to correct them endanger the traditional independence of the state’s 169 towns. Threats include Gov. Dannel Malloy’s desire to bill municipalities for a third of the state’s annual contribution to the teacher pension fund and the perennially- resurrected plan to consolidate local school districts into city-centered region.
The good news is that a policy innovation known as Education Savings Accounts (ESAs) could help to alleviate all these problems.
By offering families who want more flexibility in educating their K-12 children the financial means that would allow it, the legislature could significantly improve the quality of public education; save hundreds of millions of dollars to meet other state and local fiscal needs; and accomplish all of it without threatening towns’ control of their own school districts.
What are education savings accounts?
Education savings accounts are an effective way to expand educational options for all families, particularly those in need. For instance, they can help K-12 students who suffer from learning disabilities, have under-nurtured gifts and talents, or experience frequent bullying to reach their full potential.
For parents who voluntarily elect to custom tailor their child’s education, a specified amount is annually deposited to an education savings account (ESA) at a state-selected agency. Families can then draw on this account for a variety of approved instructional expenses, including tuition and fees for independent school placements, textbooks, tutoring, online classes, transportation, and special services.
Under one model, providers chosen by the family may directly bill the agency holding the ESA funds, simplifying paperwork. And parents may carry forward unspent annual allotments to use in the more expensive high school years, or to offset later college tuition.
Currently, six states have legislated ESA programs, some targeted specifically toward special needs students, others with a broader focus. These states are Arizona, Florida, Mississippi, Nevada, North Carolina, and Tennessee.
To see how an ESA program would successfully address all three of Connecticut’s most difficult policy challenges, let us briefly review them.
Challenge #1: Connecticut’s Deficient K-12 Funding Mechanism
In 2005, the Connecticut Coalition for Justice in Education Funding (CCJEF), a consortium of groups including public sector unions and some cities, led suit in Superior Court to challenge the constitutionality of the state’s system for funding public education. It argued that many K-12 schools, especially in the larger cities, are insufficiently financed.
Eleven years later, in September of 2016, Superior Court Judge Thomas Moukawsher shocked both plaintiffs and policymakers by declining to rule on funding adequacy, but holding instead that the state did fall short of its obligation in the following areas: (1) intervening in struggling school districts when local government falters; (2) distributing education aid; (3) defining elementary and secondary education; (4) setting standards for hiring, firing, evaluating, and paying teachers; and (5) funding special education, identifying eligible students, and delivering services.
Judge Moukawsher then required the state to submit a plan within 180 days that would remedy each of the identified deficiencies. On September 15, 2016, Connecticut’s attorney general led – and was granted – an appeal of Moukawsher’s ruling at the Connecticut Supreme Court. This holding suggests that sometime late in 2017 or 2018, the legislature in Hartford could well be compelled to radically restructure Connecticut’s entire system of public education.
Challenge #2: Connecticut’s Fiscal Implosion
Amid growing concern over the shaky financial conditions of California, Illinois, and New Jersey, Connecticut is often overlooked. Its size and population are relatively small, and its proximity to New York and Boston makes its challenges easily dismissed. After all, with some of the nation’s wealthiest communities — Darien, New Canaan, and Greenwich — how bad could things really be?
Very bad, according to a 2016 study for the Mercatus Center at George Mason University. It calculated the fiscal health of all fifty states according to their short- and long-term debts, unfunded pensions, and other key fiscal obligations. Connecticut came in the sickest of all.
In recent months, all three of Wall Street’s big credit rating agencies have further downgraded the state’s debt, with Fitch and Moody’s ranking Connecticut’s fiscal soundness as the third worst in the country. S&P was only a little more generous, naming the state fourth worst behind Kentucky.
The state’s fiscal problems are especially aggravated by public pension plans which, in 2016, the American Legislative Exchange Council determined to be the most underfunded in America. The teacher’s retirement system alone is only 59 percent funded, with pension debt exceeding $10.8 billion, or $19,000 for each student in the state.
The latest push for increasing local autonomy occurred in February of 2017, when Gov. Dannel Malloy (D) proposed billing the state’s towns for one-third the cost of teacher pensions, estimated to be $407 million in the first fiscal year and then increase over the following two years to $420 million. He also proposed giving the legislature more financial control over “distressed municipalities.”
Challenge #3: Connecticut’s Loss of Local Control
These fiscal challenges are crowding out resources that could instead be directly targeted to student learning. Between 2000 and 2013, while per- pupil current education expenditures in CT increased by 31 percent, the state’s actuarially determined contributions per student increased by 145 percent. There is no indication that the growth of pension obligations will cease anytime soon. The state is tied to past commitments with high price tags.
Connecticut has a proud history of strong local government, so much so that it is one of the few states with no county government. The map line separating, say, Tolland County from Windham County means little more than the line itself. In theory, the state’s 169 towns either run their own school districts or, in the case of very small communities, share facilities with a neighboring municipality.
Yet ever since the 1990 recession, which led to the adoption of a state income tax in 1991, each new fiscal problem has precipitated either greater state regulation of the towns or growing calls for regional government.Today, Connecticut has an enormously constraining statute – the “minimum budget requirement” – that actually prohibits most school districts from reducing their spending even when the student census drops.
An Elegant Policy Solution
No one policy, by itself, could completely resolve three of Connecticut’s most difficult challenges, all of which have been building for years. But it would be equally remiss to ignore an empowering policy that could make a positive impact across multiple fronts. Consider the following:
How ESAs would address CCJEF v. Rell
Education savings accounts address each of the important points raised by Judge Moukawsher in his September 2016 decision:
First, by giving parents an alternative to keeping their child in the local public school, they offer a quick and efficient method for intervening when a district is unable to meet a student’s needs.
Second, ESAs represent a fundamental structural improvement to public education by giving the people who know students best – their parents – the control to shape their children’s education to meet each child’s unique needs. They can provide parents with an ongoing opportunity to individualize and fine-tune the education their children receive to ensure that their needs are met. The value of educational choice has been validated by a large body of research examining many student outcomes including tests of academic achievement, high school graduation rates, college acceptance and persistence, and the development of civic values.
Third, ESAs can provide a sustained and equitable funding stream to underserved students and students with special needs. A program can differentiate ESA amounts based on student backgrounds. For example, economically disadvantaged students and students with special needs can receive ESAs worth more than ESAs for general education students.
How ESAs Would Improve Connecticut Finances
Education savings accounts are distinct from other forms of school choice — like vouchers and tax-credit programs — because they allow the widest possible range of choice. In contrast to vouchers and tax-credit scholarship programs, which provide financial assistance for school tuition only, ESAs allow parents to take advantage of an expanding range of instructional options, from one-on-one tutoring to online classes, in addition to (or instead of) private school tuition. If the cost of providing an ESA to a student is less than the taxpayer’s cost to educate the student in district schools, then students who switch from district schools will generate savings. Notably, when students leave school districts for any reason, the district usually retains revenue from local property taxes and most federal revenue. As a result, per-pupil spending tends to increase as students leave, a common byproduct of school choice programs.
There have been 30 analyses that have attempted to estimate the fiscal effects of private school choice programs. Twenty-seven found that the programs save money for taxpayers, and three found that the programs are revenue neutral. None have found that school choice programs have net costs for taxpayers.
A 2014 report by the Friedman Foundation for Educational Choice (now EdChoice) examined the ten largest school voucher programs in the U.S. that financially assist students to attend schools of their choice. This analysis went beyond just comparing the face value of a private/parochial school scholarship to the per-pupil cost at neighboring public schools. It also considered the fact that students already attending independent institutions would be eligible for assistance and that many students with learning disabilities would have to receive enough to cover special services. Even accounting for these and other variables, the average annual per pupil savings from these programs turned out to be $3,400.
A 2016 fiscal analysis by EdChoice examined ten tax-credit scholarship programs in seven states and estimated that these programs saved states and school districts between $1.7 billion and $3.4 billion through 2013-14, or up to $3,000 per scholarship student.
Given the unusually high average per pupil cost of public education in Connecticut, $16,249 according to the Connecticut School Finance Project’s most recent calculations, the cumulative savings from ESAs can be very substantial. Table 1 below shows that having just two percent of the state’s children receiving an ESA worth $5,000 would yield an annual surplus of $26 million for the state, or about $2,500 in savings for each scholarship student. Districts would experience even larger savings, exceeding $50 million, or about $5,000 per scholarship student. Note that a district’s fiscal effect per student will be the same regardless of the reason for leaving the district. The fiscal effect on the state will depend on several factors, including the value of the ESA awarded and how many scholarships are awarded to students who would enroll in a private school even without financial assistance from the ESA program.
More details about the analytic methods are in the appendix, along with district-specific results.
If ten percent of Connecticut K-12 students were educated with ESAs, the savings to the state would be about $130 million – equal to almost 10 percent of the state’s required $1.3 billion pension payment to the teacher’s retirement system for FY 2018. School districts would experience an even larger scal benefit — more than $250 million in variable cost savings. Variable costs are costs that vary with enrollment. Examples include classroom supplies, textbooks, software licenses, and salaries and benefits for personnel.
For an ESA worth $10,000, the net fiscal effect for the state would be a cost saving worth between $25 million and $127 million (about $2,500 per student).
These estimates are based on data that the Connecticut State Department of Education, (SDE) reports annually to the United States Department of Education’s National Center for Education Statistics (NCES). These data allow us to estimate the potential fiscal effects on the state and local school districts. One limitation to using these data is that the fiscal impact of an ESA program on the state will depend on how the ESA amount is determined and interacts with the state’s school funding formulas. In addition, because there is a lag in data reporting (FY 2014 is the most recent year financial data are available), precision of any analysis may be somewhat lower than an analysis based on more recent data.
As such, we also estimate the combined fiscal effects of ESAs by using data from the SDE on the Net Expenditures Per Pupil (NCEP). Using these data offer at least two advantages. First, they are more current than the NCES data. Second, these data are widely used by policymakers, analysts, and public officials in Connecticut and considered the state’s “official” numbers. On the other hand, these data don’t account for all funds that support K-12 education in Connecticut, whereas state education departments report everything to the U.S. Department of Education. Thus, estimates based on the SDE data may understate the fiscal effect.
To estimate variable cost savings, we used NCES data to estimate the percent of total costs that are variable costs and then applied these rates to each district’s NCEP. Table 2 reports the results.
An ESA worth $10,000 would yield overall savings worth between $5 million and $25 million, assuming ESA take-up rates of between 2 percent and 10 percent. Assuming the same take-up rates, an ESA worth $5,000 would generate a larger fiscal benefit overall, worth between about $58 million and $288 million.
How ESAs Would Preserve Town Autonomy
Private school choice programs so far have been targeted to certain disadvantaged student populations and funded at levels significantly lower than public schools. Participation has depended on eligibility and funding. As promising as education savings accounts appear to be, the evidence from other states with narrow programs is that they are unlikely to be used by more than ten percent of the student population under similar models that target low-income students or students with special needs. This is because the expansion of educational options for families can motivate school districts to perform at their best, leaving ESAs for the use of students whose needs genuinely require a different academic setting. This also relieves districts of their obligation to educate students who leave. And because districts would receive some portion of funds for students they’re no longer obligated to educate, the amount of resources per student remaining in district schools will increase.
The result is that town-based school districts could remain vital and intact. District-draining property tax increases and the proposals some have made to regionalize schools in the wake of CCJEF v. Rell would no longer be a threat to Connecticut’s tradition of local independence.
Education savings accounts can help address the Nutmeg State’s troubled finances with a plan that improves its biggest and most costly service — public education — while preserving its unique and time-honored character. Horace Mann, inventor of the idea of publicly-financed education, was a Connecticut native. It is only fitting that this state benefit from the newest and most promising education funding innovation.
Private school choice programs generate a variety of outcomes, including academic effects on participants and public schools, high school graduation rates, college attendance and persistence, civic values, crime, and fiscal effects. This report examines just one outcome, the fiscal effects on taxpayers, and ignores any potential benefits from the other outcomes just listed.
Whether a program saves money will be based on a straightforward fiscal alignment: if the cost of providing an ESA to a student is less than the taxpayer’s cost to educate the student, then that student will generate savings. A student eligible for an ESA program who would have enrolled in a nonpublic school without financial assistance from the ESA program would generate a cost for taxpayers. Savings are therefore generated by students who would enroll in public schools without the existence of the school choice program.
The fiscal impact on the state will be largely driven by the state’s funding formula. School choice policies usually tie awards to a state’s portion of education funding. School districts typically keep revenue from local property taxes and some federal revenue. As awards are usually less than the state’s total per-student cost to educate student in public schools, choice programs usually generate savings, and a byproduct of these programs is that the amount of resources for each student who remains in a district school increases.
A key factor for a program’s net fiscal impact is the portion of program participants that are“switchers” vs. “non-switchers.” “Switchers” are students who would enroll in a public school without financial assistance from a school choice program ( financial assistance allows them to switch from a public school into a non-public school environment). “Non-switchers” are those who would enroll in a non-public school environment even without financial assistance. Notably, data on these groups in current school choice programs are very limited and usually non-existent.
The fiscal impact on a school district will depend on that district’s cost structure. In the short run, costs are separated among fixed costs, variable costs, and quasi-variable costs. In the long run, all costs are variable, meaning that, over time, districts can adjust their budgets proportionally to any change in enrollment. This is a fundamental economic and accounting principle.
This analysis estimated short-run variable costs using cautious methods by other economists. On a statewide per-pupil basis, short-run variable costs for public schools in Connecticut are $12,541, which is 64 percent of total per-pupil costs. This estimate is slightly lower than what Scafidi (2012) estimated for Connecticut and within the range of estimates by Bifulco and Reback (2014).
We estimated average variable costs for each school district in Connecticut with financial data that the Connecticut State Department of Education (SDE) reports annually to the U.S. Department of Education’s National Center for Education Statistics (NCES). The most recent year these data are available is for school year 2013-14. The analysis used the same accounting method as Spalding (2014) and Lueken (2016). We consider the following expenditure categories as variable in the short-run: instruction, instructional staff support services, and student support services. This approach is more cautious than Scafidi’s method, which also includes enterprise operations and food service.
Another reason that estimates are cautious is because we consider administrative costs as fixed costs. Between FY 1992 and FY 2015, however, the number of administrators and other non-teaching staff nearly doubled in Connecticut while student enrollment increased by just 13 percent (Scafidi, 2017). Even though costs for non-teaching personnel appear variable based on these data, we consider them fixed in the analysis.
The NCES data provide total state costs for each school district, as reported by the SDE. The appendix tables provide a range of fiscal effects estimates for an education savings account (ESA) program that provides an ESA for each student who participates. Different scenarios are based on a $5,000 ESA and a $10,000 ESA.
The fiscal impact on school districts is the difference between the state revenue reduction from students who leave to participate in the ESA program and the variable cost burden relief from being relieved of the responsibility of educating them.
The fiscal impact on the state is the difference between the cost to fund the ESA program and the reduction in funding the education for fewer students in public schools.
The analysis examines 166 regular school districts and excludes charter schools and non-regular school districts. There are 11 districts that would incur a net cost from students who transfer into the ESA program. Notably, this is due to the districts’ cost structure. When students leave for any reason, whether to transfer to another district, a home school environment, or to move out of the state, the district will incur a net cost because the reduction in state aid outweighs its variable costs. For the remaining 155 districts examined, the estimated variable cost burden relief outweighs the loss of state aid revenue when students leave.
The tables present a range of estimates based on assumptions that number of students who would leave district schools via the ESA program equal 2 percent and 10 percent of a district’s enrollment.
Caveats and Considerations
If the ESA program allows eligibility for nonpublic school students, then some of the savings will be offset by any students from this group who would participate in the program (“non-switchers”).
Demand for the program will depend on the amount of financial assistance. The higher the ESA amount, the greater the demand for the program. Most private school choice programs that exist today are limited in nature. Participation rates in the initial year average about 1 percent of the eligible population, and about 2 percent in the second year. Nevada enacted the first universal ESA program (the legislature is still deliberating how to fund the program). So far about 7,700 applicants have been led with the state’s treasurer’s office, or about 2 percent of eligible students. The ESA amount is about $5,900 for students from low-income families and about $5,200 for all other students. The program requires prior enrollment in a public school, and all students who are kindergarten age are eligible for the program.
Note that estimates do not account for the potential fiscal effects if students with disabilities use the program. In general, the cost to educate students with special needs is, on average, twice the cost to educate mainstream students. Costs increase with the severity of a child’s disability. If the ESA amount is set at the low-end amount considered in the analysis ($5,000), then participation in the program by students with special needs will likely be very low.
About the Authors
Dr. Martin F. Leuken is the Director of Fiscal Policy and Analysis at EdChoice
Dr. Lewis M. Andrews is president of the Children’s Educational Opportunity Foundation of Connecticut and a contributor to The Federalist, Real Clear Policy, and The Wall Street Journal.
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