California’s public schools were spared in the state’s 2025 budget, but that doesn’t mean the state’s school districts should breathe a sigh of relief. The final state budget, approved by lawmakers, aimed to close the $46.8 billion state deficit but left public school dollars unscathed—for now.
“This budget remarkably insulates K-14 funding from cuts, abides by constitutional requirements to restore funding in the future, and even provides a modest cost-of-living increase, all amid a record budget shortfall,” said Kevin Gordon, president of Capitol Advisors Group, a consultancy company.
However, California’s state budget crunch shows no signs of abating. And with public school enrollment projected to drop nearly 16% by 2031-32, the fiscal outlook for many public school districts is bleak, despite record funding boosted by COVID relief funding in recent years.
A new Reason Foundation study shows how state policymakers can adapt and better use K-12 dollars. The report examined two California hold-harmless funding policies that provide extra funding to schools based on outdated enrollment numbers and factors unrelated to students.
First, it looked at how California calculates education funding for school districts. States like Texas, Indiana, Arizona, and others divvy up state education dollars based on the number of students currently in their schools. But California lets school districts choose the highest number of the current year’s enrollment, the prior year’s enrollment number, or the average number of students in its schools over the three most recent prior years. This results in taxpayers sending money to public schools for “ghost students”— kids who are no longer in classrooms but still generating funding for schools.
Hold harmless policies are supposed to make public school budgets more predictable, but they also have steep price tags. Statewide, Reason Foundation finds California taxpayers sent public schools $4 billion for 401,000 ghost students in 2022-23. Over 6% of the state’s total K-12 formula aid was allocated based on ghost students—a large share considering this is more than half of what’s spent on grants for disadvantaged kids, a supposed priority under the state’s Local Control Funding Formula (LCFF).
Most of California’s school districts received funding for ghost students, with over 300 districts getting at least $1,000 per student. Top recipients of taxpayer money for students no longer in their schools included San Diego Unified ($90.9 million), Long Beach Unified ($73.8 million), and Santa Ana Unified ($59.3 million), which each had thousands of ghost students.
The biggest winner was the Los Angeles Unified School District (LAUSD), which collected $508 million for 50,400 ghost students in the 2022-23 school year, Reason Foundation finds.
For years, students have been fleeing LAUSD. Between 2015-16 and 2022-23, the district’s enrollment dropped by 15% for various reasons, including parents looking for better schooling options and moving to more affordable places.
Ghost student funding reduces school districts’ incentives to improve or budget responsibly. It has allowed LAUSD and other districts to kick the financial can down the road, putting off difficult decisions like school consolidation or staff reductions. For example, while losing all those students, rather than make tough choices, LAUSD added 1,800 new staff during the COVID-19 pandemic and gave out pay raises last year because its funding didn’t reflect the student exodus. To balance its books, LAUSD’s $18.4 billion budget for 2024-25 is tapping into its reserves, which it could deplete in the next few years.
The study also evaluated California’s Minimum State Aid (MSA) policy, which requires school districts to receive as much state aid as they did in 2012-13, regardless of current enrollment or local wealth. In 2022-23, 148 districts got MSA funding totaling over $186 million. Most beneficiaries were Basic Aid school districts—property-wealthy districts that don’t qualify for state formula aid and are often higher-spending.
For example, Pacific Grove—which spent over $28,500 per student in 2022-23—got $1,624 per student in MSA funding. Santa Monica-Malibu got $1,043 per student in Minimum State Aid funding despite spending over $25,000 per student. It’s clear that MSA now only serves to top off the coffers of school districts that are already flush with cash.
For California lawmakers, the solution is straightforward. Education funding should be tied directly to students actually in schools, which is what LCFF is intended to do. California should allocate K-12 education funding based on current year enrollment and eliminate Minimum State Aid giveaways undermining the state’s funding formula. Doing so would be fiscally prudent and start to put the right incentives in place for public schools.
Aaron Garth Smith is director of education policy at Reason Foundation and co-author of the new report, “The cost of state hold harmless policies in K-12 education.”
