Staff shortages drive up labor costs that may cause a K-12 credit crunch

K-12 leaders are now staring at the double whammy of staff shortages and increased labor costs that they may not have the funding to sustain. Throw in inflation, and districts are being forced to offer more competitive–and financially uncomfortable–salaries to recruit and retain staff, says a K-12 market analysis recently released by the financial firm, Fitch Ratings.

Despite declining K-12 funding, the education sector’s credit quality remains strong–for now–due to state funding mandates, budgetary flexibility tied to enrollment trends, and the $192.5 billion infusion from the CARES Act, Fitch says. But the firm also repeated the warning that district administrators have been hearing all along: Maintaining salary increases and other ongoing expenses backed by COVID relief will demand new funding when ESSER expires in 2025.

Resignations in K-12 had climbed 38% by April 2022 compared to February 2020 at the same time the number of newly certified teachers has fallen by about 20%, Fitch says. At the same time, state and local education vacancies have been increasing over the last decade, reaching 3.6% in February 2022.

The outlook for individual districts will rely, in part, on their credit ratings. And Fitch laid out the following potential potholes for lenders. “Lower-rated districts, which often have weaker revenue growth and lower financial reserves, may be more constrained in managing rising expense pressures,” Fitch’s analysis says. “Higher-rated districts generally have healthier financial cushions to temporarily absorb increases in costs without meaningfully affecting ratings.”

As most administrators know, one of the biggest pressures they face is that K-12 salaries have been falling farther and farther behind private-sector wages. While K-12 was still keeping pace around 2009, the gap has been widening over the last decade-plus, reaching “the largest differential on record,” Fitch says. And as most K-12 leaders also know, this has left teachers earning less than private-sector workers with similar levels of education and experience. Inflationary pressures are now further eroding the value of educators’ salaries.

District leaders in cities such as Chicago, Minneapolis and Sacramento have dealt with strikes by teachers demanding salary increases, staffing shortages solutions, and improved health and safety protocols. Most administrators are also contending with staff who are becoming fed up with pandemic teaching demands, coronavirus infection concerns, and changing mask and vaccination policies, Fitch notes.

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“While job openings and resignations are tracking below the broader economy,” the analysis concludes, “school districts are less nimble and have less flexibility compared with the private sector to adjust compensation or other employment conditions to entice workers, as policies must be approved by the school board and remain in place for the school year.”

Retention roadblocks

Recent research confirms what many in education have long believed: Principals play a central role in retaining teachers. Their impact may be even bigger than many realize.

Principals who have led their first school for five or more years hire many more teachers who persist, according to the results of a study just published in the Journal of Educational Administration. Researchers focused on Texas found that many schools in the state never achieve this retention level because the average principal stays in their school for only four years. The study also found that principals of schools with historically high turnover have a better chance of reversing the trend if they stay for at least five years.

The report also urges state and district-level leaders to:

• Develop standards for state licensing and principal PD programs.
• Invest in a statewide infrastructure that gives principals access to coordinated, high-quality and sustained professional learning.
• Prioritize equity by increasing access to high-quality professional development in underserved schools and districts.
• Reform state and local policy to build comprehensive, aligned pipelines of qualified school principals and a coherent system of development.