The Great Recession’s Impact on School District Finances in New York State - Federal Reserve Bank of New York

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Economic Policy Review

The Great Recession’s Impact on School District Finances in New York State

October 2015 Volume 21, Number 1

Authors: Rajashri Chakrabarti, Max Livingston, and Elizabeth Setren

A slowly emerging literature explores the effects of the Great Recession on different parts of the economy; however, very little research examines the impact of the Great Recession (or any other recession) on schools. Given the fundamental role of education in human capital formation and growth, understanding the effect of recessions on schools is essential. This article contributes to filling this gap. Exploiting detailed panel data on a multitude of school finance indicators and a trend shift analysis, it examines how the Great Recession affected school finances in New York State. While it finds no evidence of effects on either total funding or expenditures, both funding and expenditures experienced important compositional changes. There is strong evidence of substitution of funds on the funding side: the infusion of funds with the federal stimulus occurred simultaneously with statistically and economically significant cuts in state and local financing, especially the former. On the expenditure side, instructional expenditure was maintained, while several noninstructional categories such as transportation, student activities, and utilities suffered. Important heterogeneities in experience are also observed by poverty level, metropolitan area, and urban status (urban, suburban, or rural). Affluent districts were hurt the most, while analysis by metro area reveals that the New York City metropolitan area, especially Nassau County, sustained the largest reductions in most expenditure categories. The findings of this study promise to enhance our understanding of how recessions affect schools and the role policy can play in mitigating the consequences.
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