Report: California spent $4 billion on ‘ghost’ students no longer attending school in their districts

West Contra Costa Unified School District received nearly $40 million in attendance-based state funding for more than 3,700 students who weren’t actually in the district’s schools for the 2022-23 school year. Across the bay, San Francisco Unified collected $42 million for some 4,000 students who weren’t in district classes.

A new Reason Foundation study found the two Bay Area districts were among the 10 biggest beneficiaries of recent statewide public school funding changes meant to ease the financial burden of declining enrollment.

However, researchers at the Reason Foundation, which describes itself as a libertarian free-market-oriented public policy research organization, argue that scarce education dollars are being sent to schools whose actual student counts don’t reflect the funding. Statewide, California spent approximately $4 billion on students no longer attending their district under those policies, the report found.

“A lot of times legislators don’t really know how much these policies cost or how dollars are ultimately allocated to school districts,” said Aaron Smith, co-author of the study and Reason’s director of education reform.

Kenneth Kapphahn, a fiscal and policy analyst at the state Legislative Analyst’s Office, noted that the study focuses on the 2022-23 school year — the year with the greatest gap between actual attendance and the attendance for which they were funded.

“That’s the year districts were still being funded based on their pre-pandemic levels, but their actual attendance was reflecting all of the drops that happened at that time,” Kapphahn said. “Starting in 23-24, pre-pandemic attendance funding is starting to phase out while districts’ actual attendance levels are increasing.”

In California, schools are funded based on average daily attendance — a head count of students in class every day throughout the school year — rather than the number of students enrolled in the district. The study examined the difference between schools’ actual attendance counts and the counts for which they were funded.

California school enrollment dropped by nearly 15,000 students for the 2023-24 school year, marking the seventh consecutive year of statewide declines. Though enrollment declines are slowing, the state projects the Bay Area will see an additional enrollment loss of 14% by 2033.

San Francisco Unified School District, which declined to comment on the policies, said it is working to address state concerns about deficit spending and stabilizing district finances. Its enrollment totaled 55,452 for the 2023-24 school year.

“We are putting SFUSD on the path to long-term fiscal solvency and positioning ourselves to create the best possible learning environment for students,” the district’s superintendent Matt Wayne said at a June 25 board meeting.

At West Contra Costa Unified, the district temporarily handed over budget planning responsibilities to Contra Costa County last month after the school board failed to pass its budget plan by the state deadline. The state’s Fiscal Crisis and Management Assistance Team found the district at a high risk for fiscal insolvency earlier this spring due to declining enrollment and deficit spending. Officials at the district, which has 29,528 students, did not respond to questions.

State funding for education has been boosted by recent state “hold harmless” policies that aim to protect district budgets from unexpected enrollment declines, which accelerated with the COVID-19 pandemic. The policies guarantee schools that state funding won’t fall below 2012-13 levels and allow them to average out attendance counts to soften the blow of steeper declines.

The declining enrollment provision became more generous after the COVID-19 pandemic took a toll on student attendance, which would have had a large impact on school funding under existing policies, Kapphahn said.

“The Legislature’s concern,” Kapphahn said, was that the decline “was too overwhelming for districts to deal with all at once.”

Public Policy Institute of California researcher Julian Lafortune said “hold harmless” policies are designed to temporarily stabilize budgets and give schools and districts a bit of extra time to adjust to significant changes in attendance or a funding formula. The policies don’t fund schools in perpetuity, he said.

“Think of it as a delay,” Lafortune said. “If declines continue, they’ll still have to downsize. … The timeline has just kind of shifted back by a year or two.”

But the nonprofit Reason Foundation argues such policies fund thousands of additional students who are not actually enrolled in districts and arbitrarily allocate dollars that could be put to better use.

The study found that for the 2022-23 school year, nearly 85% of California’s 931 school districts received hold-harmless funding under the declining enrollment policy at a cost of $4.06 billion. That covered 400,000 more students than actual attendance counts. More than a third were for transitional kindergarten through third-graders.

Los Angeles Unified School District received more than half a billion dollars under the state’s declining enrollment policy and had a total of more than 50,000 additionally funded students, according to the study.

Other Bay Area schools benefitting from the policy included San Jose’s Alum Rock Union Elementary School District, which received more than $15 million for some 1,500 students no longer attending the district’s schools. Cupertino Union Elementary School District pulled in $24 million in funding for more than 2,400 students who weren’t in classes.

The Reason Foundation also criticized California’s minimum state aid policy, which it said primarily benefits wealthier school districts that wouldn’t typically receive any state aid because they are funded through local property taxes. Under the current law, those districts keep any extra property tax revenue and get the minimum state aid they’re promised.

“That is adding to their fiscal advantage that they have relative to other districts,” Kapphahn said. “The study was raising that as an equity concern. That this is providing more funding to districts that already have a significant fiscal advantage over other districts and we’ve had a similar critique of that policy in the past.”

Smith — the study’s co-author — said he hopes California policymakers will reconsider “hold harmless” policies, especially as California schools face a “bleak” financial future.

“If you’re going to fund public schools and send dollars to use in classrooms, you should do so in a way that ties dollars to students,” Smith said. “And in my view, these hold-harmless policies don’t do that.”