Legacy Costs and Fiscal Stress in Rural School Districts in New York State

• In Event: Property Taxation and Local Fiscal Health

Abstract

Over the past several decades, many rural communities have experienced population decline, causing falling school enrollments and a shrinking local tax base. From 1995 to 2024, student enrollment in New York’s rural districts dropped by more than 25%, creating a structural mismatch between revenues that decline with enrollment and costs that remain stable or continue to rise. These fiscal pressures have intensified in recent years due to inflation, rising pension and healthcare benefit costs, and periods of reduced, insufficient, or uncertain state and federal aid. Because rural districts already face disadvantages in staff recruitment and course offering compared to urban and suburban districts, fiscal constraints can deepen existing regional inequities in public education.

This study examines both the status and drivers of fiscal stress in New York State’s rural school districts by combining a comprehensive financial condition analysis with a focused analysis on the so-called “legacy costs”, which are defined as expenses stemming from past commitments that persist even as enrollment declines. Legacy costs include pension costs, healthcare benefit costs, debt service costs, and capital project costs.

This analysis uses district-level fiscal and demographic data for more than 600 New York State school districts from 2010 to 2024. We construct multiple financial indicators across key dimensions of fiscal health, including fund balance ratios, surplus ratios, debt ratios, liquidity ratios, and fixed cost ratios. These measures describe the prevalence and intensity of fiscal stress in rural districts, compare rural fiscal conditions with those of non-rural districts, and identify factors most strongly associated with fiscal strain. We also use this data to identify and measure legacy costs—including pension costs, healthcare costs, debt service costs, and capital project costs—both as a percentage of the budget and on a per-student basis. Regression analysis with two-way fixed effects is used to examine how legacy costs crowd out spending in core educational functions and how they are related to the fiscal stress of school districts.

We find that legacy costs constitute a substantial and growing share of rural district budgets—about 17.64% in 2023–2024 (approximately $7,594 per student)—exceeding levels in city and suburban districts. Healthcare costs for employees (i.e., OPEB benefits) are rising especially rapidly in rural and town districts, which also bear higher per-student debt service and capital costs.

Regression results also indicate a crowding-out pattern -- higher per-student legacy costs are associated with lower per-student spending in core categories, particularly educational (including instructional) spending and general government spending. We also observe that legacy costs are associated with reductions in fund balance ratios and operating ratios. These results help explain how legacy cost burdens constrain staffing, student supports, and course offerings in rural districts, contributing to persistent regional inequities in education.

The findings have broader policy implications for state and local decision-making on education finance. We suggest the importance of aligning state aid with fixed and legacy cost burdens and strengthening multi-year budgeting practices that integrate enrollment forecasts with projected legacy costs.

Author

• Gang Chen, University at Albany
  Presenting Author