We examine the determinants of district spending and revenue shocks following the onset of the Great Recession and the role of fiscal federalism in mitigating these shocks. We test whether spending and revenue shocks were driven primarily by local labor market conditions or state finance centralization efforts. Utilizing population level data for all public school districts in the continental United States and a difference-in-differences strategy that models pre-recession resource trends, we find that local labor market conditions explain district spending loss in the wake of the Great Recession. In contrast, the degree of centralization in a state’s education finance system is not correlated with district spending loss. Resource poor districts were especially ill-equipped to offset fiscal fallout, and federal fiscal stimulus did little to mitigate—and, in some cases, exacerbated—differential declines in school spending resulting from local labor market shocks. Together, this paper provides evidence to policymakers that state centralization efforts—often intended to promote school resource equity—did not increase fiscal vulnerability to recessionary events. The results also highlight the potentially unintended role that fiscal federalism might play in widening district spending inequality in the wake of recessionary events.
Keywords: Great Recession; fiscal federalism; educational spending; educational resources
JEL codes: H52, I21, I24, I28