Funding for U.S. public K-12 schools is based on enrollment. More students means more money. In 31 states, public schools use the previous year's enrollment to determine current year funding, making it easier to soften the financial blow when enrollment declines. In other states, school funding is based on current year enrollment, meaning any changes in attendance are immediately reflected in the budget.

Some groups criticized the previous year's funding approach -- also known as the "do no harm policy" or "funding conservation" -- that provided schools with money for "ghost students," calling it costly and unfair. Concerns like these may have prompted Arizona to change its funding model in 2017, providing public finance scholars like us an excellent opportunity to evaluate the differences in the impact of the two models on school budgets.

We analyzed data from 190 school districts in the state from 2011 to 2020, a period that included six years before and three years after Arizona's policy change. In the first three years after the state ended its funding protection policy, school districts with declining enrollment immediately received less state funding.

Our analysis shows that school districts are more stable when state funding is based on headcount from the previous year. When enrollment declines, we find that high-income districts are more likely than low-income districts to cut instructional and administrative spending and reduce the number of teachers, especially less experienced educators. This is a short-term effect. We don't know what will happen in the long term.

We did not explore why, but we believe it is because wealthier areas already have more fat in their budgets that could be cut, while poorer areas are already quite lean and cutting where they can. Moreover, wealthier districts appear to benefit more from funding policies that rely on enrollment numbers from the previous year.

As enrollment in U.S. public schools gradually declines, it becomes increasingly important to understand the consequences of this policy change. It is expected to decline by 5% between 2022 and 2031.

Additionally, with the Trump administration planning to cut federal spending on K-12 public schools, more of the burden will be borne by states. Federal funding accounts for about 10 percent or less of school funding. Reduced federal funding could prompt more schools to move to a funding formula based on current-year enrollment.