Appendix A
Background Papers

These papers, which were prepared for the panel, are to be published in a Special Issue of the Journal of Official Statistics.

How Best to Hand Out Money: Issues in the Design and Structure of Intergovernmental Aid Formulas

Thomas Downes, Tufts University

Thomas Pogue, University of Iowa

The Legislative Process and the Use of Indicators in Formula Allocations

Dan Melnick, Dan Melnick Research

Interactions Between Survey Estimates and Federal Funding Formulas

Alan M. Zaslavsky, Harvard University

Allen L. Schirm, Mathematica

The Canadian Equalization Program

Michelle Taylor, Finance Canada

Sean Keenan, Finance Canada

Jean-Francois Carbonneau, Statistics Canada



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Statistical Issues in Allocating Funds by Formula Appendix A Background Papers These papers, which were prepared for the panel, are to be published in a Special Issue of the Journal of Official Statistics. How Best to Hand Out Money: Issues in the Design and Structure of Intergovernmental Aid Formulas Thomas Downes, Tufts University Thomas Pogue, University of Iowa The Legislative Process and the Use of Indicators in Formula Allocations Dan Melnick, Dan Melnick Research Interactions Between Survey Estimates and Federal Funding Formulas Alan M. Zaslavsky, Harvard University Allen L. Schirm, Mathematica The Canadian Equalization Program Michelle Taylor, Finance Canada Sean Keenan, Finance Canada Jean-Francois Carbonneau, Statistics Canada

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Statistical Issues in Allocating Funds by Formula Using Survey Data to Allocate Federal Funds for State Children’s Health Insurance Program (SCHIP) John L. Czajka, Mathematica Thomas B. Jabine, Statistical Consultant WIC Funding Formula Evolution Dawn Aldridge, U.S. Department of Agriculture Impact of Title I Formula Factors on School Year 2000-01 State Allocations Paul Sanders Brown, U.S. Department of Education Formula Allocation for Schools: Historical Perspective and Lessons from New York State James A. Kadamus, New York State Education Department A Study on the Formulation of an Assessments Scale Methodology: The United Nations Experience in Allocating Budget Expenditures Among Member States Felizardo B. Suzara, United Nations Statistics Division To provide background for its deliberations, the panel commissioned a set of papers that appear as articles in a special issue of the Journal of Official Statistics. Each article benefited from reviews by the guest editors, a subset of panel members, and at least one outside referee. This special issue is a joint activity of the Panel on Formula Allocations and the Journal of Official Statistics. The first three articles lay out how the formula allocation process works; examine the underlying goals, roles, and structure of fund allocation formulas; and describe the legislative development process and how formula features, underlying data, and estimation procedures interact in producing formula outputs. These articles are followed by U.S.-based and international case studies that serve to illustrate many of the issues raised in the first three articles. The case studies are drawn from U.S. programs that address children’s health, women’s and children’s nutrition, and education; from a Canadian program designed to reduce discrepancies in the fiscal capacity of the provinces; and from the United Nations’ dues assessment procedures.

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Statistical Issues in Allocating Funds by Formula In the opening article, Thomas Downes and Thomas Pogue examine the design and structure of intergovernmental aid formulas. The authors discuss a wide range of issues that relate to alternative, often contradictory, aid objectives. In addressing how best to hand out money, they show how program goals can be optimally translated into aid formulas. Optimality relates to such goals as reducing fiscal disparities and making tax and expenditure activities of recipient governments geographically neutral; generating a more equitable distribution of tax burdens; or reducing inefficient provisions of a public service attributable to interjurisdictional spillovers. The authors assess the extent to which, in practice, formulas deviate from the ideal and examine the economic and social effects of these deviations. In the second article, Dan Melnick focuses on how, in the context of broadly stated program goals, the legislative process influences the design of formula-based funds allocation. He looks at how the formula-based approach itself influences both the legislative process and government programs. The statistical challenges associated with formula allocation needs are complicated by operational realities that can affect the choices of statistical indicators ultimately used for formulas. The paper provides new insights into the process whereby policy makers and statisticians must fashion formulas that pass the test for face validity while generating the necessary political support. Alan Zaslavsky and Allen Schirm provide a compliment to the Downes and Pogue paper. They describe how formula characteristics, data input sources, and statistical estimation procedures interact to determine funding allocations. Emphasizing allocation of U.S. federal funding to state and local entities, their central theme is that, while some consequences of these interactions are straightforward to predict, others are not. As a result, fund allocations are not always consistent with program goals. The authors simulate a series of multiyear scenarios to illustrate combinations of formula properties, data sources, and estimation procedures that are likely to produce allocations that don’t line up with original intentions. They give special attention to problems caused by the introduction of new surveys for producing formula inputs. The fourth paper leads off a set of program-specific case studies. Michelle Taylor, Sean Keenan, and Jean-Francois Carbonneau provide an overview of the Canadian Equalization Program, a program designed to narrow fiscal disparities among the provinces through intergovernmental aid. The basis of the transfers is to enable the relatively less prosperous and

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Statistical Issues in Allocating Funds by Formula more prosperous provinces to provide roughly comparable levels of services. The authors discuss the historical and administrative background of the program and emphasize the central role of formulas in meeting program goals. John Czajka and Thomas Jabine extend the volume’s coverage of issues treated by Zaslavsky and Schirm by evaluating the use of survey data to estimate inputs for allocation formulas. The authors provide a comprehensive overview of the allocation process for the State Children’s Health Insurance Program and recommend improvements. They discuss statistical problems created when allocations must be based on survey estimates that have large sampling errors. Dawn Aldridge examines the history and formula features of the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). Aldridge traces how program goals have been manifested in a sequence of formulas, starting from the initial phase after the program was introduced in the early 1970s (when the congressional mandate emphasized expanding the number of eligible people reached by the program) to the 1990s, when the program had stabilized and program goals shifted toward an equitable distribution of resources across states. Aldridge shows how the rule-making process for the WIC program attempted to reflect these objectives. Title I, Part A, of the Elementary and Secondary Education Act establishes grants to states and local educational agencies (LEAs) or school districts with disproportionate numbers of poor school-age children. Paul Brown analyzes how the interaction of factors such as the introduction of new data sources, use of hold-harmless guarantees, and political compromise has affected Title I allocations. For the 2000-2001 school year, he assesses how formula features interact to affect, sometimes in a contradictory manner, state-level and per child allocations. The case study illustrates “the tension that exists between the conflicting needs to target funds and to ensure funding stability for those LEAs that stand to lose as a result of new data.” In a second article on education funding, James Kadamus summarizes the development of school aid in his state. He communicates valuable lessons for those charged with using formulas to distribute aid at any level of government. He examines the historical context and the stated objectives of education aid in New York from the practitioner’s perspective, describing the evolution of New York school aid formulas as incremental but “punctuated by occasional reforms.” Kadamus discusses the effects on

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Statistical Issues in Allocating Funds by Formula this evolution created by the often competing goals of increasing educational opportunities and improving financial stability as well as by problems of targeting aid to student needs, ongoing funding formula design and data quality challenges, and the federal role in education. In the final article, Felizardo Suzara provides an international perspective. Unlike the foregoing articles, his describes a formula that allocates a tax obligation rather than a benefit. He shows how the United Nations (UN) uses formulas to allocate among member states the contributions required to finance its operations. Suzara describes how the UN’s Committee on Contributions prepares the scale of assessments and advises the General Assembly on all aspects of its methodology “with a view to making it simple and transparent, stable and, most importantly, fair and equitable.” In this context, in which capacity to pay can be calculated in a variety of ways, the formula is manifestly the result of extended negotiations and compromises among the participating stakeholders.