by John Garrett Clawson. (Faculty supervisor/editor: Paul von Hippel.)

Table of Contents

Introduction

Education savings accounts (ESAs)  are a school choice mechanism that withdraws some state education funds from the public school system and puts them in the hands of parents. Participating parents receive the funds on a debit card which they can use for a variety of education services, including tuition, tutoring, and other services such as therapy for children with special needs.

The impact on the state budget depends on how much money the state withdraws from the public schools vs. how much the state spends to fund parent debit cards. These amounts can vary according to the number of students that participate, their characteristics, and the characteristics of their school districts.

On this Wiki page we estimate the impact on the state budget of an ESA bill proposed by Texas Legislators in the 85th Texas Legislative Session in 2017 (Senate Bill [SB] 3). With a favorable mix of students and district, we estimate that the program would have had a net benefit to the state budget of approximately $54 million in year 1 and twice that in year 2. With an unfavorable mix of students and districts, however, the program would have had a net cost to the state of approximately $135 million in year 1 and twice that in year 2.

Further data on the likely characteristics of participating students and districts will help to narrow down the range of estimated budget impacts. 

Definitions

To clarify the ESA program's implications for the state budget, we must distinguish the gross cost from the net cost of the program.

The Total Annual Gross Cost is the amount that the state disburses to debit cards given to ESA users each year. In the ESA bill that came before the Texas legislature in 2017, the amount disbursed to each potential family's ESA is defined as follows:  participates in the program a payment from the state to the child ’s account in an amount that is equal to: "A parent of an eligible child shall receive each year that the child (1) 75 percent of the state average maintenance and operations expenditures per student for the preceding state fiscal year; or (2) If the child is a child with a disability, 90 percent of the state average maintenance and operations expenditures per student for the preceding state fiscal year." (Sec. 29.358 of 2017 SB 3). Here "educationally disadvantaged" students, also known as "economically disadvantaged" students, are those eligible to participate in free or reduced-price lunch or to receive some other form of public assistance (Texas Education Agency 2014). We use the term  "home district" to designate the district that the student would have attended without the ESA.

Under the terms of the 2017 Texas bill, the gross cost to the state of an individual ESA student depends on the following factors:

• the student's characteristics (special education, "educationally disadvantaged", or neither ["traditional"]),
• the state average maintenance and operations expenditures per pupil. 

Because the amount disbursed to an ESA card is no more than would have been spent on the child in their home district, it might appear as if the program would have no net cost, and might even have a benefit. But the program can have a net cost, because ESAs are funded entirely by state dollars, whereas the state is only responsible for part of district spending.

The Total Annual Net Cost is the total annual gross cost minus the amount that the state would have spent on the ESA participants in public schools. In districts where the state recaptures excess local property taxes, we should also subtract any increase in recapture funds that the state receives because of reductions in district enrollment.

• Net Cost = Gross Cost – Reduction in State Support – Increase in Recaptured Funds

Net Costs for Different Students and Districts

The budgetary implications of ESAs depend on which students and districts make most use of them. ESA users from some districts will have a higher net cost to the state than others.

1. If an ESA user comes from a property poor district where the state provides the bulk of funding, the state's net cost will be low, or there may even be a net benefit to the state. What the state disburses to the ESA card will be comparable to what it recovers in reduced support of the district.
2. If an ESA user comes from a middle- to upper-middle income district where the state provides a small to moderate share of funding, then the state's net cost is relatively high. It will pay out 80-100 percent of student educational costs through the ESA, but it will only recover a small to moderate fraction of that from the district.
3. If an ESA user comes from one of the property-richest districts where the state recaptures excess local property taxes, then the state will have no net cost and may even have a benefit. What the state disburses to the ESA card will be no more than what it recovers in increased recapture.

Further data are needed to determine which types of district will participate the most. The implications for the cost of the program are substantial.

The mix of students also matters. The gross and net costs will be higher for students who educationally disadvantaged or who participate in special education. These students were given priority in the bill that Texas considered in 2015.

In addition, some students who use ESAs will be students who never intended to enroll in public schools. For those students, the state's net cost is equal to the gross cost since the state will not recover funds from reductions in public enrollment. The ESA bill proposed in 2015 had provisions to reduce the number of students in this category, but they cannot be eliminated, and it is likely their number would grow with time.

Size of the Program

The ESA bill that Texas considered in 2015 would have capped enrollment, limiting annual program growth to “one-half of one percent of the total number of students in average daily attendance in grades 1 through 12 in the state during the previous year” (SB 1178, 2015). If a similar program began in 2017, 0.5% of students (26,160) would be eligible for an ESA during year 1,1.0% would be eligible in year 2, and so on. If more students applied to participate than could be funded, then according to the 2015 bill the state would give first priority to children with special needs or children who are "educationally disadvantaged" (SB 1178, 2015). 

Some states with ESAs or school voucher programs have loosened eligibility requirements over time, allowing a greater number of students from more varied backgrounds to obtain ESAs. For example, Nevada’s ESA program allows participation by any student who is eligible to attend a public school. This can exacerbate the expenses associated with the program as the state must increasingly bear new education costs associated with children whose parents never intended to send them to public school in the first place. 

The ESA bill that Texas considered in 2015 stipulated that ESA participants would have to be enrolled in a public school the year prior or eligible to enter first grade for the first time in the upcoming school year (SB 1178, 2015). Under this provision, students who are now in private school would not be eligible. Initially, this would reduce parents' ability to take ESAs if they never intended to enroll their children in public school. Within 12 years, however, all students who were in private school at the start of the program would have graduated, and there would be no ineligible students left. 

Program Modeling

To modeling an ESA program's budget impact, we must assume something about the characteristics of participating districts and students. A number of assumptions are possible. We illustrate the calculations using the assumptions below.

• We assume that district spending will average $10,371 per student in school year 2017-18 (Villanueva, 2016). This figure incorporates both state and local revenue.
• We assume that ESA participation will begin at 26,160 students and grow by the same number every year.

Then the program's estimated annual net cost per student is determined by subtracting the state support per student amount from the annual gross cost per ESA participant ($10,371 for students with special needs or educational disadvantages and $8,296 for traditional students). The total annual net cost is projected by multiplying each annual net cost per student by its respective student population then adding the products together.

From the state's perspective, the lowest cost scenario is one in which all ESA recipients are traditional public school students from an ISD in recapture (e.g. Austin ISD). While the state would receive the full per-student funding total from the district, it would only have to disburse 80% of that total to each traditional student per the language in SB 1178. Consequently, the state would save approximately $2,000 for each one of these students that left the public school system with an ESA. The state could expect to save around $54 million in year 1, twice that in year 2, and $271 million in year 5.

Another low-cost scenario would occur if all ESA recipients were classified as special education or educationally disadvantaged and resided in low-wealth districts that obtained all of their per-student funding from state support. In this scenario, the state government would break even every year as the total reduction in state support would be equivalent to the ESA disbursement total. 

By contrast, a high-cost scenario is one where ESA recipients are special education or educationally disadvantaged and reside in a districts where the state does not recapture funds and pays a small to moderate amount of education costs. In these districts, the state is only able to reimburse itself for a fraction of what it disburses to ESAs. For example, if the state paid half the costs of education in a district with annual expenses of $10,000 per student, then for each ESA recipient the state would disburse $8,000-10,000 to the ESA, but would only recoup $5,000 in reduced payments to the district. The net cost to the state would be $3,000-5,000 per student.

The highest-cost scenario for the state would be one with adverse selection. In the extremest version of adverse selection, all ESA students are incoming first graders whose parents never intended to send them to public school prior to the program. Then the state's gross costs would be 80-100 percent of per-pupil spending in those students' home district, but the state would not recover any funds because public enrollment in the home district would not decline.

The table below gives two extreme scenarios. One is an extremely low-cost scenario where all ESA participants are traditional students from a low-wealth district where the state pays 100% of district expenses. Here the state reduces its district payments by 100% of each student's costs, but only pays out 80% of those costs to the student's ESA. The net benefit to the state budget would be $54 million in year 1, $108 million in year 2, and $271 million in year 5.

The other scenario is a relatively high-cost scenario where all ESA participants are educationally disadvantaged or special education students from a moderate-wealth district where the state pays half of education expenses. Here the state reduces its district payments by 50% of each student's costs, but it has to pay out 100% of those costs to the student's ESA. The net cost to the state budget would be $135 million in year 1, $271 million in year 2, and $678 million in year 5. This is a high-cost scenario, but higher-cost scenarios are possible. For example, costs would be higher if the state were responsible for less than half (e.g., 20 percent) of a district's spending and the district was not in recapture. Costs would also be higher in the adverse selection scenario where some ESA participants were children from families that never intended to attend public school.

None of these scenarios is necessarily realistic; they are simply meant to illustrate the range of possibilities. Data on the likely characteristics of participating students and districts can help to narrow the range and clarify the likely costs of the program.

ESAs in Other States

While no fiscal note was prepared for the ESA bill that Texas considered in 2015, fiscal impacts in other states may provide some insight into potential costs. To date, just two ESA programs - Arizona and Nevada - are comparable to the program proposed in Texas in that they permit students without disabilities or an Individual Education Plan (IEP) to participate. 

Arizona’s ESA program did not produce any long-term savings in 2014 (SB 1363 Fiscal Note, 2013) and may produce budget deficits if eligibility expands (O'Dell and Sanchez, 2016). Some states with school vouchers programs like Indiana are experiencing program budget deficits due to the substantial number of private school students - those outside the public school system before the voucher system - electing to participate (Indiana DOE, 2015).

Because Nevada’s ESA program was temporarily halted due to concerns about the program’s constitutionality, no historical budget data currently exists. However, the state would need an additional $85 million annually if 75 percent of those already in private schools prior to program implementation decide to participate (SB 302 Fiscal Note, 2015).

References

"Glossary for the 2013-14 Texas Academic Performance Report." Tea.texas.gov. Texas Education Agency, Nov. 2014. Web. 21 Dec. 2016.

Indiana Department of Education: Office of School Finance. “Choice Scholarship Program Annual Report: Participation and Payment Data.” 2015.

O'Dell, Rob, and Yvonne W. Sanchez. "State Money Helping Wealthier Arizona Kids Go to Private Schools." The Arizona Republic. Last modified July 7, 2016. http://www.azcentral.com/story/news/arizona/politics/education/2016/02/23/state-money-helping-wealthier-arizona-kids-go-private-schools/80303730/.

S.B. 1363 Fiscal Note, Arizona 51st Cong. Schimpp, Steve. (2013).

S.B. 302, Nevada 302nd Cong. (2015).

Texas Education Agency. "Enrollment in Texas Public Schools 2014-15." Tea.texas.gov. Texas Education Agency, 12 May 2016. Web. 21 Nov. 2016.

Villanueva, Chandra. "It's Time to Renovate our School Finance System." Center for Public Policy Priorities. 18 October 2016, University of Texas-Austin, TX.