Association for Public Policy Analysis & Management

Rural school districts in the US face several distinctive challenges (e.g., declining enrollment, geographical isolation, limited fiscal capacity, and teacher recruitment). The financial vulnerability of many rural school districts is due in part to their unique reliance on federal appropriations. Federal “Impact Aid” provides revenue to districts whose capacity to raise resources through local property taxes is attenuated by a federal presence (i.e., military bases, tribal lands, federal forest reserves, etc.). Approximately 45 percent of all Impact Aid funding nationwide goes to rural districts despite the fact that rural districts only receive about 17 percent of all federal education funding. Due to this reliance on Impact Aid funding and a quirk in distribution timing, any disruption in federal appropriations can have uniquely dire financial consequences for rural Impact Aid school districts.

The federal sequester of 2013 provides a stark illustration of this risk. Implemented by the bipartisan Budget Control Act of 2011, severe across-the-boards budget cuts were triggered in March 2013 when Congressional leaders could not agree on substantive ways to lower the US deficit. While all other federal education funding programs automatically include a one-year delay between appropriation and disbursement, Impact Aid funding does not. As a result, Impact Aid districts experienced the funding reduction immediately during the 2012-13 school year, while districts that relied on other federal funding streams were unaffected until later.

This study leverages the negative fiscal shock to rural Impact Aid districts as a natural experiment to explore how these districts adjusted their educational funding. To examine this topic, we rely on a merged panel of district-year school finance data from 2006-07 through 2015-16. With these data, we consider whether the federal sequester led to decreases in school district expenditures for shorter-term expenses (e.g., current year instructional spending) or longer-term expenses (e.g. capital outlay spending). We also examine how district assets and debt levels were affected. To do this, we leverage variants of the difference-in-differences research design that enables us to study rural Impact Aid districts in the wake of the federal sequester of 2013. Unaffected rural districts (i.e., those not relying on Impact Aid at baseline) provide a viable non-treated comparison group. Unlike most prior work looking at school district responses to financial shocks, this study contributes to extant literature by examining a substantive negative shock in federal funding. A further contribution is our unique focus on rural school districts. Finally, this paper has contemporary policy relevance as it shines a light on how federal partisan discord influences fiscal capacity and the allocation of district resources.