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Making Money Matter: Financing America's Schools (1999)

Chapter: 2 Setting the Stage

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Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
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2
Setting the Stage

This chapter describes basic features of the existing education governance and finance system, since current arrangements mark the starting point for change. In it we also examine the meaning of and the assumptions behind the three goals for education finance systems implied by the committee's charge, in order to clarify the concerns we are attempting to address. Finally, we identify a set of generic strategies through which finance systems can be aligned with the goals. These strategies provide the organizing framework for our evaluation of specific policy options later in the report.

ROLES AND RESPONSIBILITIES IN AMERICAN EDUCATION

Education governance, and with it patterns of resource allocation, varies significantly across the United States. Because education is not mentioned in the Constitution, it has historically been viewed as a responsibility reserved to the states. While state constitutions almost all specifically call on the states to provide a public education system, most states have delegated much of the responsibility for financing and providing schools to local governments. States have come to play a larger role in recent years, although the extent of state responsibility varies significantly from place to place.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×
Elementary and Secondary Education in the United States

In school year 1996–97, 45,592,2131 students attended 88,223 public elementary and secondary schools in 14,883 school districts (these and the following statistics in this section, unless otherwise noted, come from U.S. Department of Education, 1999a: Digest of Education Statistics, 1998). Another 5,783,000 students were enrolled in an estimated 27,600 private elementary and secondary schools. In 1997–98, total expenditures of public elementary and secondary educational institutions were $324.3 billion or 4 percent of the nation's gross domestic product (GDP). Total expenditures of elementary and secondary educational institutions (public and private) were $351.3 billion in 1997–98 or 4.3 percent of GDP.

Elementary and secondary education is a major item in state and local budgets, but a minor one in the federal budget. Together state and local governments raise over 90 percent of the revenue for elementary and secondary schools. Although variation among states is considerable, in 1997 states on average spent 22 percent of their budgets on K-12 education. This exceeds the 20 percent share for Medicaid and the 11 percent share for higher education, the other leading categories of state spending (National Association of State Budget Officers, 1998: Table 3). Local governments on average directed 36 percent of their total expenditures to education in 1995 (Bureau of the Census, 1998: Table 519).

In 1995–96, the federal government provided $19 billion in revenues for public elementary and secondary schools, or 6.6 percent of total revenues the schools received. This amount, which accounts for only 1 percent of federal outlays for all purposes, is delivered mainly through Department of Education programs. The largest of these by far is the Title I compensatory education program, which provides grants to districts and state education agencies for educating disadvantaged students; this program was funded at $8.0 billion in fiscal year 1998. Education for students with disabilities ($3.8 billion in FY 1998) and for vocational and adult education ($1.3 billion) are the other large Department of Education programs. Not necessarily counted among revenues for public schools, but still representing sizeable federal investments in elementary and secondary education, are other large programs such as the child nutrition programs of the Department of Agriculture ($8.8 billion in FY 1998), the Head Start programs of the Department of Health and Human Services ($4.4 billion in FY 1998), and the education component of training programs sponsored by the Department of Labor ($3.8 billion in FY 1998) (1998 Digest of Education Statistics and U.S. Department of Education budget web site: http://www.ed.gov/offices/OUS/budget.html.)

1  

 A tiny but growing number of these students are enrolled in prekindergarten programs; the number of pre-K students in public schools rose from approximately 106,000 in fall 1982 to about 674,000 in fall 1996 (U.S. Department of Education, 1999a: Table 43).

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×
Diversity: Legacy of Local Control

A unique feature of U.S. education is the degree of control that has been granted to local governments. Governance arrangements (both formal and informal) matter because they determine who is in a position to decide what interests and objectives will receive priority and to influence the allocation of resources in accordance with those priorities. Given their power to raise revenue for schools, district school boards have historically played a crucial role within the governance structure. While too much local control of education may be detrimental to the educational interests of some students, it is also true that local control generates at least one key benefit worth preserving: it keeps the country from making wholesale major errors. While particular districts or states may make errors, these errors are typically remediable in a short time frame because they occur on a small scale.

Education governance has not been static; the system has been flexible and has changed incrementally over time to adjust to changing conditions. School districts have been consolidated, declining in number from 127,531 in 1932 to 16,960 in 1973 (Tyack and Cuban, 1995:19) and slightly under 15,000 today. States increased their role in financing, from 16.5 percent of revenues in 1919–20 to 47.5 percent in 1995–96 (Table 2-1). However, during the final 25 years of that period, the state share remained relatively constant despite large increases in some western states such as California (from 35 to 56 percent), Idaho (from 38 to 64 percent) and Montana (from 24 to 49 percent) (U.S. Department of Health, Education, and Welfare, 1972; U.S. Department of Education, 1999a). Through legislative action in 1993, Michigan reversed the roles of the state and local governments almost overnight. Before the reform, about two-thirds of the rev

TABLE 2-1 Revenues for Public Elementary and Secondary Schools, by Source of Funds (percentage of total), Selected Years, 1919–1996

Date

Federal

State

Local

1919–20

0.3

16.5

83.2

1929–30

0.4

16.9

82.7

1939–40

1.8

30.3

68.0

1949–50

2.9

39.8

57.3

1959–60

4.4

39.1

56.5

1969–70

8.0

39.9

52.1

1979–80

9.8

46.8

43.4

1989–90

6.1

47.1

46.8

1995–96

6.6

47.5

45.9

 

SOURCE: U.S. Department of Education, 1999a: Table 157.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

enue was generated by the local property tax. After the reform, the state took responsibility for about two-thirds of the revenue in the form of a statewide property tax and increased reliance on the state sales tax. In addition to taking on more responsibility for financing, states have also increased their role in setting educational policy (witness current efforts at establishing state learning standards).

The federal government has become a noticeable though still junior financing partner, providing 6.6 percent of revenues in 1995–96, up from virtually nothing in the early 20th century and peaking at 9.8 percent in 1979–80 (Table 2-1). It is a significant influence in the areas of its particular concerns (such as compensatory education for special populations and national standards) through the mandates and rules accompanying these funds.

In addition to government, parents are gaining more influence as they push for charter schools and various forms of school choice, and private contractors have been hired to perform many of the functions of schools. The changes have been incremental, but not inconsequential.

Nevertheless, the legacy of local government control of U.S. schools is an educational system characterized by enormous diversity across states and districts in sources of revenue and in spending levels (Table 2-2). School districts obtain revenues for education primarily through local property taxes2 and intergovernmental aid. Districts that have large property tax bases tend to rely more on local sources. Districts with low property wealth typically rely more heavily on aid from the state (Howell and Miller, 1997:40).

In 1995–96, the local government shares of education revenues ranged from 0.4 percent in Hawaii (a one-district state) and 12 percent in New Mexico to 87 percent in New Hampshire (Table 2-2). The mirror image of these patterns are the state shares, which ranged from 90 percent in Hawaii to 7 percent in New Hampshire.

In addition to balancing responsibilities differently among state and local governments, states also differ widely in the amount they spend from all sources on a per-pupil basis. Table 2-2 indicates that average current expenditure per pupil in 1995–96 ranged from $3,867 in Utah to $9,955 in New Jersey.3 Within states, large disparities exist in spending from district to district and even from school to school within districts. In Vermont, for example, a state that has recently revamped its school finance system to reduce disparities, 1995 per-pupil spending in Stowe was $8,585, whereas Bennington spent just $4,526 (National

2  

 Only in three states—Kentucky, Louisiana, and Pennsylvania—does the local property tax account for less than 90 percent of local taxes for school districts.

3  

 Current expenditures include salaries, transportation, school books, materials, and energy costs but not capital outlays or interest on school debt. The average state expenditure levels reported here have not been adjusted to reflect geographic cost-of-living differences or differences in student need.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

TABLE 2-2 Percentage of School Revenues from Local, State, and Federal Sources, 1995–96

State

Local Funds

State Funds

Federal Funds

Current Expenditure Per Pupila

Alabama

21.0%

61.3%

9.2%

4,716

Alaska

20.2

66.1

11.1

9,012

Arizona

44.6

44.1

9.0

4,860

Arkansas

26.3

60.0

8.5

4,710

California

34.2

55.8

8.9

5,108

Colorado

47.6

43.8

5.3

5,521

Connecticut

55.5

38.0

3.7

8,817

Delaware

25.2

66.6

6.7

7,267

District of Columbia

91.5

8.1

9,565

Florida

40.2

48.6

7.4

5,894

Georgia

39.4

51.9

6.8

5,377

Hawaii

0.4

89.8

7.8

6,051

Idaho

26.9

64.3

7.1

4,465

Illinois

64.3

27.3

6.1

6,128

Indiana

37.3

54.3

5.2

6,040

Iowa

40.6

49.0

5.1

5,772

Kansas

34.7

57.3

5.4

5,971

Kentucky

25.6

65.3

8.3

5,545

Louisiana

34.9

50.3

12.1

4,988

Maine

46.4

47.0

5.6

6,546

Maryland

53.7

38.2

4.9

7,382

Massachusetts

55.4

38.3

4.7

7,613

Michigan

25.1

66.8

6.1

7,166

Minnesota

33.7

58.2

4.3

6,162

Mississippi

25.2

57.8

13.7

4,250

Missouri

49.8

40.2

6.0

5,626

Montana

37.2

48.6

9.9

5,847

Nebraska

56.9

31.6

5.6

6,083

Nevada

59.8

32.0

4.5

5,320

New Hamsphire

87.1

7.0

3.3

5,958

New Jersey

55.7

38.6

3.4

9,955

New Mexico

11.8

73.9

12.2

4,587

New York

53.5

39.7

5.8

9,549

North Carolina

25.4

64.5

7.2

5,090

North Dakota

41.0

42.1

11.5

4,979

Ohio

49.0

40.7

6.3

6,266

Oklahoma

25.8

59.3

9.3

4,881

Oregon

35.8

54.1

6.5

6,615

Pennsylvania

52.9

39.8

5.5

7,492

Rhode Island

52.2

41.5

5.1

7,936

South Carolina

34.4

52.9

8.3

5,096

South Dakota

57.3

29.7

9.8

4,780

Tennessee

36.9

47.9

8.6

4,548

Texas

47.2

42.9

7.2

5,473

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

State

Local Funds

State Funds

Federal Funds

Current Expenditure Per Pupila

Utah

29.6

58.6

6.7

3,867

Vermont

64.9

27.8

4.7

6,837

Virginia

60.2

31.1

5.3

5,433

Washington

23.1

68.0

5.8

6,044

West Virginia

27.4

63.0

8.0

6,325

Wisconsin

50.6

42.9

4.3

7,094

Wyoming

40.8

51.3

6.2

6,243

U.S.

43.2

47.5

6.6

6,146

a Current expenditure per pupil in average daily attendance.

SOURCE: U.S. Department of Education, 1999a: Tables 158 and 167.

Center for Education Statistics: www.nces.ed.gov./edfin). In California, disparities across schools within a district were highlighted in a 1992 court case (Rodriguez v. Los Angeles Unified School District , Consent Decree, No. C611358, May 5), which found that this large district spent as much as $400 per year less per pupil in elementary schools serving mainly minority students than in elementary schools serving nonminority students. Guthrie (1998) cited data on intradistrict per-pupil spending differences in 1992–93 for the 24 largest districts of an unnamed midwestern state. Intradistrict differences averaged $1,074 for elementary schools and $779 for secondary schools. The largest intradistrict per-pupil difference among elementary schools was $2,092; for higg schools it was $1,475.

Intradistrict spending disparities have received much less attention than interdistrict disparities among both school finance reformers and analysts, in part because until quite recently little effort was being devoted to developing reliable data systems about financial and nonfinancial resources available at the school level (Stiefel et al., 1998). While generalizations are therefore difficult, it is clear that at least in some places there is substantial variation in fiscal resources across schools within districts, and that within districts schools with higher levels of student poverty sometimes receive lower allocations of both money and other educational resources (e.g., Rubenstein, 1998).

In sum, the large variations across states and the recent changes in some states indicate, first, the absence of a single generally accepted model of education finance in the United States and, second, the potential for states to change their finance systems. That is, despite the large role that a state's history and culture may play in influencing how it finances education, no state system is fully set in concrete and unable to change. Court pressure has often been the most

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

effective catalyst for change, and political considerations make some states more amenable to change than others.

The Paradox of Concentration Amid Decentralization

Although American education is characterized by a multiplicity of school districts, many of which enroll fewer than a thousand students, about half of all students attend schools in districts with enrollments of more than 10,000.

Table 2-3 shows the enormous range of size in American school districts. Just 226 large school districts (1.5 percent) account for more than 31 percent of the pupils in American schools. Almost half of the students (49.8 percent) are enrolled in 5.3 percent of school districts. At the other end of the size spectrum, about 7,000 school districts enrolling fewer than 1,000 students each provide education for 6.1 percent of American students.

The appearance of fragmentation and decentralization in American education is further attenuated by the realization that 24 super-size districts enroll more than 100,000 pupils each (Table 2-4). As Table 2-4 indicates, this is frequently (though not always) a big-city phenomenon. Some of these super-size districts are counted among the nation's most troubled—e.g., New York, Chicago, Detroit—although others are usually counted among the nation's best—e.g., Fairfax County, Virginia.

The districts at the two ends of the size spectrum—large urban and small rural—have frequently been the objects of special concern when it comes to education financing issues. Urban schools often must carry out their educational

TABLE 2-3 Public School Districts and Enrollment, by Size of District, 1996–97

Enrollment Size

Number of Districts

Percent of Districts

Percent of Students

Total

14,841

100.0%

100.0%

25,000 or more

226

1.5

31.1

10,000 to 24,999

569

3.8

18.7

5,000 to 9,999

1,024

6.9

15.5

2,500 to 4,999

2,069

13.9

15.9

1,000 to 2,499

3,536

23.8

12.7

600 to 999

1,772

11.9

3.1

300 to 599

2,066

13.9

2.0

1 to 299

3,160

21.3

1.0

Size not reported

419

2.8

 

SOURCE: U.S. Department of Education, 1999a: Table 91.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

TABLE 2-4 Enrollment of Public School Districts Greater than 100,000, F all 1996

School District

State

Rank

Enrollment

New York City

NY

1

1,063,561

Los Angeles Unified

CA

2

667,305

City of Chicago

IL

3

469,098

Dade County

FL

4

341,117

Broward County

FL

5

218,608

Philadelphia

PA

6

212,150

Houston ISD

TX

7

209,375

Hawaii Public Schools

HI

8

187,653

Detroit Public Schools

MI

9

182,316

Clark County

NV

10

179,106

Dallas ISD

TX

11

154,847

Hillsborough County

FL

12

147,826

Fairfax County

VA

13

143,266

Palm Beach County

FL

14

137,585

San Diego City Unified

CA

15

133,687

Orange County School Board

FL

16

129,143

Duval County

FL

17

126,118

Prince George's County

MD

18

125,198

Montgomery County

MD

19

122,505

Memphis City

TN

20

111,156

Baltimore City

MD

21

108,759

Pinellas County

FL

22

107,060

Baltimore County

MD

23

104,073

Milwaukee City

WI

24

101,007

 

SOURCE: U.S. Department of Education, 1999a: Table 95.

mission in an environment in which social conditions have deteriorated badly. Urban populations are typically characterized by comparatively high poverty rates, greater percentages of children with poorly educated parents, greater percentages of students with limited English proficiency, and high rates of student mobility. Rural schools face their own set of educational challenges, most notably poverty and sparse population spread out over large areas. Student achievement in urban schools lags that in more affluent suburbs, with student achievement in rural schools somewhere in between.

The Starting Point

This great diversity represents the starting point for changes to the education finance system. We seek a finance system that facilitates higher achievement for all students in a cost-efficient manner; that breaks, or at least reduces, the nexus between student background and student achievement; and that raises revenues

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

fairly and efficiently. We now examine the meaning and significance of these goals.

GOAL 1: FACILITATING HIGHER LEVELS OF ACHIEVEMENT FOR ALL STUDENTS IN A COST-EFFICIENT MANNER

A popular view, especially since A Nation at Risk (National Commission on Excellence in Education, 1983), is that American public schools are ''failing": failing to prepare students for the challenges of the next century and, what is worse, failing even to provide today's students with the same quality of education that their parents and grandparents got (e.g., see Finn, 1991, Itzkoff, 1994; Sykes, 1995). Meanwhile, other voices (e.g., Berliner and Biddle, 1996) see this dire portrait of the nation's schools as a "manufactured crisis" that greatly exaggerates problems with student achievement.

In our view, while schools may not be failing miserably, neither are they performing satisfactorily. In particular, they are not doing enough to challenge all students to achieve the high levels of learning that they will increasingly need to succeed in the new globally competitive economic environment. The "failure" argument neglects the quite extraordinary gains in educational attainment that have been realized over the 20th century and overstates the conclusions that should be drawn from available measures of student achievement. At the same time, there are numerous indications that the average achievement levels of American students have at best been stagnant over many years, and, moreover, that they are on average mediocre by international standards, although there are certainly pockets of excellence.

What Does Student Achievement Mean and Why Does It Matter?

The nation is increasingly committed to fostering high levels of learning for all students. Student learning has generally been gauged both by measuring the educational attainment of students (e.g., completion of high school or post-secondary education) and by how much students show that they know on tests of subject-matter knowledge. There is much controversy over how well these tests measure academic achievement; furthermore, academic achievement is only one among a number of objectives that Americans believe schools should pursue. Nevertheless, few would disagree with the proposition that academic achievement is an important objective of education, and public judgments about the quality of schooling frequently rest on how well students perform on available tests of their knowledge and skills.

Why does academic achievement matter? Until recently, one of the most politically potent arguments was that high educational achievement was essential for the economic prosperity of the country. However, that argument has been questioned in light of the current economic boom and has now been replaced by

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

a different argument that is better supported by the evidence: namely, that a changing relationship between education and employment means that an individual's future economic well-being is increasingly tied to educational attainment and achievement. The restructuring of the U.S. economy that occurred in response to the decline in the rate of productivity growth, which began in the early 1970s, resulted in remarkable strides in efficiency (by the mid-1990s, the United States had regained its position as the most competitive economy in the world), but it exacted a stiff price among workers with the fewest skills and the least education (Blank, 1997; McMurrer and Sawhill, 1998; Murnane and Levy, 1996; Murnane et al., 1995). Prior to the early 1970s, wages rose roughly proportionately for all skill groups as productivity increased. Incomes then began to diverge across groups with different levels of education. Basic cognitive skills are increasingly important predictors of wage and career opportunities, as the nature of work changes (especially for the least skilled), from jobs emphasizing strong muscles to jobs that demand much more than limited literacy and numeracy.

The effects of economic change can be seen in the widening gap between the earnings of workers with college and high school educations. The "wage premium paid to workers with a college degree relative to those with a high school degree . . . increased steadily between 1979 and 1995, from 27 percent to 44 percent for men and from 31 percent to 52 percent for women" (McMurrer and Sawhill, 1998:66). This gap reflected the fact that wages for less-skilled workers actually fell for much of the last quarter-century. Economic recoveries no longer mean rising wages for all workers (Blank, 1997). Moreover, jobs have always been harder to find for the less skilled; and the nature of economic change suggests this situation will persist, if not worsen.

Murnane and Levy (1996) point out that wage and employment gaps between college graduates and those with less education do not necessarily mean that college is essential for everyone. Rather, they observe that students who go on to college demonstrate greater skills than those who don't, even when both groups are high school seniors. Thus, "as high-wage employers increasingly search for new workers with strong basic skills they tend to bypass high school graduates who did not go to college, because so many of them lack those skills" (Murnane and Levy, 1996:8). Improving the skills of high school graduates, they suggest, would give more of them access to jobs in the changing economy.

The toll that economic change has wrought on workers has been particularly high for minorities and those from disadvantaged backgrounds, whose educational levels and performance on measures of academic achievement have typically lagged their more advantaged peers. Moreover, these are precisely the groups for whom education has been held out as offering the best route to social and economic opportunity.

Thus, the mixed picture painted in the next section about educational attainment and achievement, while not entirely justifying the school-bashing that has

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

been so frequent in recent years, does lead to the conclusion that schools can do better and must do better so that all students receive the education they will need to prosper in a complex and rapidly changing world.

Educational Attainment and Achievement

The 20th century has seen remarkable progress in enrolling and retaining students in school. At the turn of the century, 72 percent of children ages 5 to 17 were enrolled in school. This figure has continually improved, reaching 78 percent by 1920, 83 percent by 1950, and moving above 90 percent after 1990 (U.S. Department of Education, 1999a: Table 39). In 1910, 24 percent of people age 25 and over had completed less than five years of elementary school, and 14 percent had completed 4 years of high school or more. In 1997, the comparable percentages were 1.7 percent and 82 percent. For younger adults (ages 25 to 29), the comparable percentages were 0.8 percent and 87 percent (U.S. Department of Education, 1999a: Table 8).

Less clear is what has happened to student achievement levels as enrollments have expanded to encompass virtually all young people. Given the inclusion of populations who in earlier times would not have stayed in school to graduate and who might therefore be less academically inclined or motivated than students of earlier generations, one might expect to see achievement decline even if school quality had not, but in fact students seem to perform roughly as well as ever on the imperfect measures available of academic achievement.

Rothstein (1998) indicates that anecdotal stories of declining student achievement have characterized virtually all periods in American education. They cannot be proven or disproven with empirical evidence, since there are virtually no long-term testing programs that would permit scientifically valid "then and now" comparisons before 1968.

Concern about the declining quality of American education received a great boost in the 1970s because of widely publicized drops in scores on the SAT, a test designed for colleges to use in making admission decisions. Average scores declined from 980 (out of a possible 1600) in 1963 to 890 in 1980. They have risen irregularly and slightly since then (the average in 1997 was 915) (Rothstein, 1998:52–53). The SAT, though widely known, is not a particularly good instrument for tracking the health of American education, however, because it is taken by a self-selected group of college-bound students, and it is difficult to untangle the compositional effects of successive test-taking groups on changing test scores. It appears that some part of the score decline can be attributed to changes in the pool of test takers and another part to the quality of the education received by those students (Rothstein, 1998; Stedman, 1998).

A better instrument for measuring student performance over time (and the only instrument that is based on a nationally representative sample of students) is the National Assessment of Educational Progress (NAEP), which was explicitly

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

designed to monitor academic achievement. It did not begin, however, until 1969. For political reasons, NAEP was originally designed to track performance only at the national level and among certain groups of students (e.g., urban versus rural). Only since 1990 have state NAEP scores been calculated, and the testing program is still not designed to permit the calculation of scores at the substate (e.g., district, school, or student) level. While it provides important trend data on the academic performance of elementary and secondary students in key subject areas, it was never intended to measure all aspects of student achievement (for aspects not covered, see Chapter 4 and National Research Council, 1999b).

NAEP scores in math and science show declines in the early 1970s followed by improved performance; reading and writing results have been more mixed (Campbell et al., 1997:iii). In no case, however, are there overall score declines that would justify the wide pessimism frequently expressed about the quality of American schools compared with their counterparts 20 or 30 years ago. In a number of instances, gains can be cited, especially for black students. The performance of black students on NAEP achievement tests in reading, mathematics, and science improved substantially between the early 1970s and the mid-1990s, both in terms of absolute achievement levels and in comparison with whites, although some slippage occurred in the 1990s.

The perception that school quality is poor and/or getting poorer, while not supported by NAEP test scores, was probably reinforced by a new method of reporting these scores. Beginning in 1992, in addition to reporting average scores on a 500 point scale, the U.S. Department of Education has reported NAEP results in terms of the percentage of students performing at various levels: below basic, basic, proficient, or advanced. Scores reported in this way have been alarming (for example, only 21 percent of fourth graders were judged to have proficient or advanced achievement on the 1996 NAEP mathematics test, and 36 percent were judged to be below basic (U.S. Department of Education, 1999a: Table 123). A recent National Research Council (NRC) evaluation (National Research Council, 1999b:7), however, determined that "the current process for setting NAEP achievement levels is fundamentally flawed" and that "the achievement level results do not appear to be reasonable compared with other external information about students' achievement."

While an empirical case is difficult to make that the quality of American education is worse than it used to be, there is stronger evidence that it is lower than many international counterparts. Forty-one countries tested half a million students as part of the Third International Mathematics and Science Study in the mid-1990s. Achievement results were reported for three student populations (roughly 4th graders, 8th graders, and students enrolled in their final year of secondary education). U.S. 4th graders performed above the international average in mathematics and near the top in science. U.S. 8th graders, however, scored somewhat below the international average in mathematics and only somewhat higher than the international average in science. And 12th graders per-

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

formed below the international average and among the lowest of the 21 countries that tested students at this grade level in both mathematics and science (National Center for Education Statistics, 1996, 1997, 1998).

Opinion polls show that public attitudes about schools are roughly in line with these international results. The annual Gallup poll of public attitudes toward public schools, sponsored by the Phi Delta Kappan (and cited in U.S. Department of Education, 1999a: Table 22), shows adults giving the schools a grade somewhere around C or C+. Adults with no children in school assign a lower grade than do public school parents; not surprisingly, the lowest grades for the public schools come from parents with children in private schools. Schools in the local community and local neighborhood of the poll respondents get higher grades than do schools nationally.

Despite the fact that criticism of public schools has been loud and sustained for the past 15 years or so, the grades given the schools in the annual polls haven't changed noticeably for a quarter of a century. Moreover, there is no evidence that parents are fleeing public education. The percentage of students enrolled in private schools, which was 8 percent in 1910, actually peaked in 1959 at about 14 percent and has hovered around 10 to 11 percent since 1970 (calculations based on data from U.S. Department of Education, 1999a: Table 3).4

In the face of this evidence of, at worst, stagnation but not decline in educational achievement and in public attitudes, what else might contribute to the sense that public schools are not living up to expectations? Another key aspect of educational performance that has drawn increasing criticism concerns the efficiency of educational spending.

Spending, Spending Growth, and the Efficiency of Public Schools

The U.S. investment of over $300 billion annually in public precollegiate education exceeds its investment in any other public service except national defense and international relations. Citizens reasonably want to know whether these resources are being used in ways that yield the maximum possible results for the expenditures involved.

The efficiency of American education has been called into question by observers (e.g., Hanushek et al., 1994) who point to rapidly rising expenditures at the same time that academic achievement appears at best to have remained flat. To some, this combination of trends suggests that schools do not use their financial resources well and that adding increased resources to these inefficient enterprises would be unwise public policy. Others disagree with this policy conclusion,

4  

 Beginning in fall 1980, the Department of Education included an expanded universe of private schools in its data collection. Therefore, private school enrollment figures before and after 1980 are not strictly comparable.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

pointing out that the observed rise in spending overstates the rise in resources available to schools and that the challenges facing schools have increased because of the shifting demographics of the school-age population and of new legal requirements about educating children who are more expensive to educate, such as those with disabilities or whose first language is not English.

Growth in Educational Expenditures since 1970

Both total and per-pupil current expenditures for public primary and secondary education have grown rapidly in the United States over the past quarter-century.5 Real current expenditures increased about 93 percent from $146 billion in academic year 1969–70 to $282 billion in 1997–98. (These figures are adjusted for inflation using the consumer price index or CPI with 1997–98 as the base year, adjusted to a school year basis.)

Because student enrollment in public elementary and secondary schools remained virtually the same between 1970 and 1997, growth in current expenditures increased spending per pupil: from $3,430 in 1970–71 to $6,131 in 1997–98 (constant 1997–98 dollars). Enrollment changes occurred unevenly, with declines in the 1970s and early 1980s (from 46 million students in 1971 to 40 million students in 1985) and then increases beginning in 1986 (growing to over 46 million students in 1997). Increases in per-pupil spending also occurred unevenly, growing 27 percent in the 1970s and 37 percent in the 1980s, but leveling off to 3.6 percent between 1991 and 1998.

Even in periods when student enrollments declined, the number of teachers increased, growing from about 2 million in 1970 to 2.7 million in 1997. The result was a substantially lower pupil-teacher ratio in 1997 (17 pupils per teacher) than in 1970 (22 pupils per teacher). This change is one of the factors frequently cited as proof of the inefficiency of public schools, which failed to translate more teacher resources per pupil into gains in student improvement. Skeptics (e.g., Hanushek and Rivkin, 1996) also note that the growth in all staff exceeded that of teachers alone. Staff includes—besides classroom teachers—principals, assistant principals, curriculum specialists, library specialists, guidance counselors, psychological personnel, and other professionals. The pupil-staff ratio fell from 13-to-1 in 1970 to 9-to-1 in 1996.

Changes in total expenditures reflect not only enrollment and staffing trends, but also trends in salaries. Salaries and benefits for teachers and others who provide instruction represent over 55 percent of current expenditures. Average teacher salaries (adjusted for inflation, with 1997–98 as the base year) increased

5  

 Current expenditures include salaries, transportation, school books, materials, and energy costs. They exclude capital outlays and interest on school debt. Unless otherwise indicated, data are taken from the Digest of Education Statistics, 1998 (U.S. Department of Education, 1999a).

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

just 4.4 percent between 1970–71 and 1997–98, from $37,735 to $39,385. Teacher salaries are usually tied to years of experience, among other things; over the same period, the American Federation of Teachers reports that the average experience of teachers increased from 11.2 to 16.0 years (Nelson and Schneider, 1997: Table II-4).

Understanding Expenditure Growth

A number of factors complicate the interpretation of the growth in education spending over time and make it difficult draw conclusions from data on spending growth about the production efficiency of schools (Ladd, 1996; Rothstein and Miles, 1995; Consortium on Productivity in the Schools, 1995).

Adjusting for Changes in Costs

One problem is how to account for changes in the price of educational resources or inputs over time, in order to distinguish between the growth in spending caused by cost increases and the growth that represents real change in the amounts of input being used.

Analysts disagree about the proper method for accounting for cost changes in education. Some analysts believe that commonly used general prices indices, such as the CPI or the deflator the gross domestic product, understate the rising costs of educational inputs. This understatement occurs because the indices do not take into account the fact that education and many other service sectors have to raise salaries to compete successfully with other sectors for workers, yet these sectors do not benefit as much as the rest of the economy from technological changes that lead to productivity improvements (see Baumol, 1993). Because the CPI understates the rise in costs, adjusting spending by the CPI leads to an overestimate of the growth rate of real resources.

Some analysts argue for using a cost index specifically designed to take account of the education sector's reliance on inputs whose productivity cannot grow very fast. Rothstein and Miles (1995), for example, develop and use an index that measures inflation in service sectors other than rent/shelter and health care in their recent study of the growth of school spending. Based on this inflation index, they conclude that real per-pupil spending increased by 61 percent between 1967 and 1991, or about 40 percent less than real per-pupil expenditure growth based on the CPI. An alternative cost index specifically developed for primary and secondary education is available for the academic year (AY) 1974–75 to AY 1994–95. Using this index, real per-pupil current expenditures grew 36 percent between AY 1974–75 and AY 1994–95 in comparison to the 51 percent increase as calculated with the CPI adjustment. Using either of these indices would lead to the conclusion that while real per-pupil expenditures in public primary and secondary education did rise between 1970 and 1995, the

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

actual growth in real resources required to maintain a given level of education was not as large as has been measured using more conventional inflation indices.

Other analysts question the use of an index specifically designed for education. Hanushek and Rivkin (1996:5) point out that these indices are difficult to adjust for changes in the quality of labor, "a key concern in the consideration of teachers" whose wages comprise a large proportion of education costs. Moreover, there has been a profound shift in the overall labor market for women in the last half-century that has resulted in a lessening of barriers to women in the general labor market and a decrease in the attractiveness of teaching. Such labor market shifts are also difficult to capture through standard wage indices or through deflators based on service industries. While there is some validity to these objections, the issue remains a real one: the use of the CPI to deflate growth in spending leads to an inflated estimate of how much growth there has been in the real resources available to provide educational services.

Special Education

A major concern of both practitioners and scholars has been the growth in expenditures on educating students with disabilities—called special education—since passage of the Education for All Handicapped Children Act in 1975 (P.L. 94–142; hereafter EHA). This federal law requires school districts to provide a "free and appropriate" education to children with disabilities, in accordance with an individualized education program (IEP) developed for each affected child. The federal government partially reimburses districts for the costs of special education, but federal aid is estimated to cover only 7 percent of these expenses (U.S. Department of Education, 1997).

Since passage of EHA, the number of students ages 0 to 21 classified as disabled grew from 3.7 million pupils in 1976–77 to 5.9 million in 1996–97 (U.S. Department of Education, 1999a: Table 53). Of this 5.9 million, 5.2 million were ages 6 to 21; this represented 10 percent of all children enrolled in public and private elementary and secondary schools (U.S. Department of Education, 1998). The average cost of educating a special education student has been estimated at 1.9 to 2.3 times the cost of providing education to a student in "regular" education (Chaikind et al., 1993). Total costs for special education are currently estimated at $32 to $36 billion annually.6 The growing costs of special education have alarmed education practitioners, raised fears that mandated special education expenditures were "crowding out" funds for regular education, and have led to

6  

 The cost estimates are marginal costs; that is, what was spent on special education over and above what these children would have cost if they were regular students enrolled in regular classrooms. Cost estimates for special education in particular are notoriously imprecise, for reasons discussed in Chapter 7.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

disagreements among analysts about how much of the increase in overall education expenditures should be attributed to new special education requirements.

Hanushek and Rivkin (1996) conclude that spending on special education had a disproportionate effect on the growth in education costs in the 1980s, but they doubt that increased resources for special education can be blamed for the largest portion of the recent increases in per-pupil spending. They attribute about 18 percent of the per-pupil expenditure growth during the 1980s to spending on special education and estimate that increases in special education spending accounted for less than one-third of the fall in the pupil-teacher ratio during the 1980s.7 They cite in support of their position the small percentage of students classified as having disabilities of the total student population. They also observe that the general increase in per-pupil spending as well as the decrease in pupil-teacher ratios is pervasive across heterogeneous school districts with varying proportions of students with disabilities.

Other studies place a greater portion of the responsibility for expenditure growth on increased expenses for special education. Lankford and Wyckoff (1995) estimate an average of 30 percent of the increased real spending on education in the major school districts in the state of New York between 1980 and 1992 was the direct result of teaching students with disabilities. The impact was disproportionate in New York City, where special education accounted for 60 percent of the increase. Lankford and Wyckoff also showed that spending requirements under EHA have a greater impact during times of state fiscal downturns; they estimate that although spending on teaching students with disabilities accounted for 26 percent of the growth in spending between 1980 and 1989, it accounted for about 85 percent of the growth between 1989 and 1992. Hanushek and Rivkin also recognize that the contribution of special education costs to expenditure growth cannot be considered in isolation from constraints on state budgets.

Rothstein and Miles (1995) examined changes in the growth and composition of education spending in nine "representative" school districts across the nation between 1967 (pre-EHA) and 1991. After adjusting for inflation using their service-sector index, they estimate that the share of total per-pupil spending on special education increased from 3.7 percent in 1967 to 17 percent in 1991. Moreover, spending on special education accounted for the largest share of net new money (38 percent) between 1967 and 1991 in these nine school districts. Rothstein and Miles find that the share of total per-pupil spending going to

7  

 In 1994, Helen Ladd reexamined the numbers used by Hanushek and Rivkin in their calculation of the contribution of special education to the decline in the public school pupil-teacher ratio (Ladd, unpublished data, Terry Sanford Institute of Public Policy, Duke University). Using data from the Digest of Education and the Annual Report to Congress on the Implementation of the EHA, she calculates that over 50 percent of the decline of the pupil-teacher ratio is attributable to the expansion of special education between 1980 and 1990.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

regular education in these nine districts declined from 80 percent in 1967 to 59 percent in 1991.

The absence of reliable nationwide data makes it difficult to determine just how much of the increase can be accounted for by state and federal requirements that schools provide educational services to all children with disabilities. Nonetheless, it is clear that a significant part of the growth in education spending over the last quarter-century can be attributed to the growth in special education.

Changes in Student Backgrounds

Children whose home backgrounds deprive them of economic, social, and health "capital" come to school less ready to learn than their more advantaged peers. To the extent that the number of children from disadvantaged backgrounds has been growing, costs of education might be expected to have grown as schools attempted to provide compensating educational services.

It is impossible to determine what proportion of the last quarter-century's overall increase in educational expenditures should be attributed to such changes, although the impact in some districts has undoubtedly been large. On one hand, some of the factors generally thought to make children more expensive to educate have become more prevalent in the school-age population, but on the other, certain changes in families' circumstances may have enhanced children's learning ability. For example, the percentage of children younger than 18 living in families with incomes below the poverty level increased from 15 percent in 1970 to 21 percent in 1992. There has also been a significant and consistent growth in the incidence of children living in single-parent families since 1969; in 1992, around 45 percent of poor children and 80 percent of black children lived with a female head of household. More mothers now work; the proportion of wives in married couples in the paid labor force increased from 40 percent of married women in 1970 to 58 percent in 1990. Working in the other direction, the educational attainment of parents has gone up, as has the real median family income of families with children, average family size has gone down, and the percentage of children with some preprimary education increased in the 1980s (Bureau of the Census, 1992).

The precise relationship between the changing socioeconomic status of students and the growth of education costs is not clear. Related research, however, provides some information on how these changes have affected student achievement between 1970 and 1990. Grissmer et al. (1994) conclude that the improvements described above in parental education, family size, and family income, as well as an increase in the age of the mother when the child was born, have had a greater impact on student achievement (in a positive direction) than have changes in family circumstances that are associated with decreases in achievement. Findings from other studies support in part the results from the Grissmer et al. study. Powell and Steelman (1996) found a strong positive relationship between par-

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

ents' education and average state SAT scores. Blake (1989) finds a positive relationship between smaller family size and higher achievement. The evidence of the effect of working mothers on student achievement is mixed. Milne et al. (1986) found a negative effect on achievement from living in a single-parent family or having a mother in paid employment. However, in a critique of the research by Milne et al., Heyns and Catsambis (1986) found a weaker link between mother's employment and student achievement.

In summary, it is difficult to evaluate how the changing background characteristics of students have affected their achievement or the associated costs of the educational system as a whole. It appears that the aggregate effect of changing family characteristics on the growth of education costs is probably small and of undetermined direction. In areas of increasing concentration of poverty, however, such changes are likely to have a large and significant adverse impact on student achievement or educational costs or both.

Improving Achievement While Using Money Well

Our evaluation of the evidence leads us to conclude that school performance and public confidence have not deteriorated as much as the rhetoric surrounding schools suggests, and the achievements of American schools in the 20th century have perhaps been too seldom acknowledged in recent years. At the same time, both public opinion and available national and international achievement measures indicate that the nation has a long way to go in educating all students to high standards. The fact that schools have undergone almost constant efforts at reform over the past century (Elmore and McLaughlin, 1988; Tyack and Cuban, 1995), with no evidence that academic achievement has been significantly boosted as a result, indicates the difficulty of the task and the importance of reviewing in this report what is known and unknown about improving school performance and about possible strategies for aligning school finance with this objective. The unsettled debate over the efficiency of schools further suggests that how school finance strategies do or could encourage desirable efficiencies must also be an important topic for investigation.

GOAL 2: BREAKING THE NEXUS BETWEEN STUDENT BACKGROUND CHARACTERISTICS AND STUDENT ACHIEVEMENT

The increasing importance of education to success in the labor market highlights the significance of disparities in educational opportunity. Of particular concern are continuing gaps in academic achievement related to the background characteristics of students, such as race and family income. Although many factors beyond schooling contribute to these gaps, it is important to determine the

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

extent to which education finance strategies currently exacerbate those gaps and to explore what school finance reforms might reduce them.

Gaps in Attainment and Achievement

One of the most persistent and troublesome indicators of unequal opportunity in American schools has been the difference in academic attainment and achievement among groups of students defined by such background characteristics as race and income. Upon close study, the achievement picture is complicated, with signs of real progress as well as reasons for continuing concern.

A major accomplishment has been the near parity reached between black and white Americans in educational attainment at the high school level. In 1920, 45 percent of blacks ages 25–29 had less than five years of elementary school education, compared with 13 percent of whites, and only 6 percent of blacks had four years of high school or more, compared to 22 percent of whites. By 1997, near parity had been achieved: 87 percent of non-Hispanic blacks ages 25–29 had four years of high school or more compared with 93 percent with their white non-Hispanic counterparts. Most of this progress in black educational attainment took place after 1960. Separate figures for Hispanics have been reported only since 1980. Here the news is not so good: in 1997, only 62 percent of people ages 25–29 had attained four years of high school or more, an increase of only 4 percentage points from the 1980 figure (U.S. Department of Education, 1999a: Table 8). This signifies some but not a great deal of progress.

Much attention has been focused over the years on test score gaps among students from different racial/ethnic groups, with the black-white test score gap the most prominent and intensely studied. Introducing a recent collection of research papers on the subject, Jencks and Phillips (1998:1) summarize the issue: ''African Americans currently score lower than European Americans on vocabulary, reading, and mathematics tests, as well as on tests that claim to measure scholastic aptitude and intelligence. This gap appears before children enter kindergarten, and it persists into adulthood. It has narrowed since 1970, but the typical American black still scores below 75 percent of American whites on most standardized tests. On some tests the typical American black scores below more than 85 percent of whites."

Test scores in reading and mathematics on NAEP increased for black children in the 1970s and 1980s and the gap between black and white test takers' scores diminished by about half (Campbell et al., 1997). Since the late 1980s, though, the trend toward smaller gaps between black and white students' scores has partially reversed as black student scores have dropped somewhat. Hispanic students' scores show a similar pattern, with an overall narrowing of the gap with white students' scores since the mid-1970s and some recent slippage backward.

NAEP scores also differ by place of residence, with "urban fringe" students performing at higher levels than their rural or central-city counterparts (U.S.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

Department of Education, 1994, 1996). Recent trend data by place of residence are not available, nor does NAEP collect data on the income levels of test takers' families. Numerous other studies, though, beginning with the Coleman report in the mid-1960s, have consistently shown that test scores and family income levels are directly related (Coleman et al., 1966). Since 1986 NAEP has measured the level of school poverty for tested students. Recent unpublished tabulations prepared for the National Assessment of Title I (U.S. Department of Education, 1999b) indicate that NAEP reading scores for 9-year-old public school students in high-poverty schools (more than 75 percent of students eligible for free or reduced price lunch) dropped by 2 points between 1988 and 1996, and mathematics scores improved by 9 points or about one grade level.

Educational Achievement and School Spending

As Jencks and Phillips' (1998) recent volume exploring the causes and possible remedies for the black-white test score gap vividly illustrates, the relationship between test scores and student background characteristics is complex and only partially understood. Of particular interest to us as a committee on education finance are the relationships between family income and student achievement on one hand and between family income and district-level spending on the other. Given the large disparities in spending across districts already mentioned and the causes that are examined in much more detail in the next chapter, one important question is the extent to which these disparities are related to variations in the income levels of families residing in different school districts.

Several U.S. Department of Education reports (Parrish et al., 1995, 1998; Parrish, 1996a, 1996b) use data for academic years 1989–90 and 1991–92 to examine variations among school districts and across states in the revenues available for educational programs and services and their relationship to family and community characteristics. Looked at from a national perspective, families living in the poorest districts—those with the highest poverty levels and the lowest median incomes (where income levels have been adjusted for differences across districts in the cost of living)—had lower per-pupil revenues than those in the richest districts (Table 2-5). For example, in 1991–92, districts with 25 percent or more of their school-age children in poverty had average total per-pupil revenues only 89 percent of the average total per-pupil revenues of districts with less than 8 percent of school-age children in poverty. Similarly, districts with median household income of less than $22,000 had average per-pupil revenues only 81 percent as large as the average revenues per pupil of districts with cost-adjusted median household incomes of $38,000 or more. Urban districts had just slightly more revenue per pupil than suburban districts and 18 percent more than rural districts, while districts with the lowest minority enrollments had 7 percent less revenue per pupil than districts with the highest level (50 percent or more) minority enrollments.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

When district revenue figures were adjusted to reflect costs and student needs (described in the notes to Table 2-5), the comparative situation of urban and high-minority-enrollment districts changed. Reflecting the fact that high-minority and urban districts are often high-cost areas, the cost and need-adjusted revenues per pupil for urban areas were 97 percent of the suburban districts, and the high-minority-enrollment districts had per-pupil revenues that were 96 percent of low-minority-enrollment districts. Race itself does not appear to be the key demographic variable explaining the difference in spending between low-minority and high-minority districts, however. When race was considered simultaneously with other factors, the poverty of families, rather than their race, was the variable that correlated more with the buying power of education dollars in different districts. Poorer families lived in districts that spend less. These nationwide differences understate differences that are seen within some individual states (Table 2-6) and, because commonly used measures to adjust for student needs are presently quite imperfect, they may well understate the costs faced by districts with large enrollments of at-risk students.

These figures suggest that student background characteristics like race and income that are correlated with lower student test scores are also correlated with lower spending on schools. They signal the importance of examining what is known about the relationship between educational spending and student achievement, an issue taken up in Chapter 5.

The Condition of Children and Education in Cities

We have seen that student achievement as measured by test scores is lower for children living in central cities than for their suburban and rural counterparts. This is one manifestation of a widely perceived crisis in urban education. As Education Week put it in introducing a massive special issue on the "urban challenge," "it's hard to exaggerate the education crisis in America's cities. . . . When people talk about the problems in public education, they're usually not talking about suburbs or small towns. They're talking about big-city schools—specifically the ones that serve poor children" (Education Week, 1998:6,9).

Achieving the goal of breaking the nexus between family background and student achievement requires special attention to this urban challenge. Minorities and poor people are heavily concentrated in cities. In 1990, 57 percent of all blacks and 52 percent of all Hispanics lived in central cities (National Research Council, 1999a: Table 2-3); 60 percent of individuals in metropolitan areas living in households below the poverty line lived in central cities rather than in suburbs (National Research Council, 1999a).

Moreover, residential racial segregation is extraordinarily high in most U.S. metropolitan areas, a feature of cities with special implications for education. Because school attendance is largely based on residential patterns, school segregation is also very high. In 1991–92, 66 percent of all black students and 73

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

TABLE 2-5 Total Revenues per Student, 1991–92

 

 

Revenues per Student

 

Percentage of All Students Enrolled

Actual

Cost-Adjusteda

Need-Adjustedb

Cost-and Need-Adjusted

Revenues by School-Age Children in Poverty

 

 

 

 

 

Less than 8%

22.2%

$6,266

$5,863

$5,427

$5,080

8-<15%

23.6

5,273

5,289

4,506

4,521

15-<25%

27.7

5,162

5,409

4,339

4,547

25% or more

26.6

5,600

5,557

4,587

4,554

Revenues by Minority Enrollment

 

 

 

 

 

Less than 5%

21.5

5,425

5,558

4,631

4,739

5-<20%

24.9

5,598

5,541

4,794

4,741

20-<50%

26.6

5,353

5,454

4,527

4,610

50% or more

27.0

5,797

5,538

4,786

4,574

Revenues by Metropolitan Status

 

 

 

 

 

Urban/central cities

26.9

5,781

5,539

4,788

4,593

Suburban/metropolitan

48.8

5,748

5,533

4,915

4,730

Rural

24.3

4,894

5,477

4,111

4,597

Revenues by Median Household Income (cost-adjusted)

 

 

 

 

 

Less than $22,000

16.8

5,391

5,707

4,417

4,677

$22,000 - <$26,000

26.9

5,407

5,389

4,498

4,489

$26,000 - <$30,000

22.1

5,189

5,339

4,390

4,518

$30,000 - <$38,000

21.4

5,566

5,374

4,780

4,617

$38,000 or more

12.8

6,650

6,113

5,785

5,321

a Education revenues are expressed in cost-adjusted terms to reflect variations in real education resources, as opposed to nominal dollars. The cost-adjustments used are based on the teacher cost index (TCI) developed by Chambers (1995), which measures variations in the costs of comparable teachers across geographic locations.

b Student-need adjustments reflect the varying needs of three categories of special needs students, which were weighted to equal more than one student. Special education students are given a weight of 2.3, compensatory education students a weight of 1.2, and limited-English-proficient (LEP) students a weight of 1.2. To apply this adjustment, the counts of special needs students in each district are then multiplied by their weights to calculate a total weight count.

SOURCE: Parrish et al., 1998: Tables II-1, II-2, II-6 and II-7.

percent of all Hispanic students attended schools that were predominantly minority, and 34 percent of each group attended schools that were 90–100 percent minority (Orfield et al., 1993). Residential segregation declined, but only slightly, between 1970 and 1990. Similarly, there have been modest declines since 1968 in the proportion of blacks and Hispanics attending predominantly minority schools and massive drops in the percentage of blacks attending 90–100 percent minority schools from 64 percent in 1968 to 34 percent in 1991; however, the percentage of Hispanics attending such schools grew from 23 to 34 percent over the same period. Virtually all of the improvement occurred in the early years of that period, and school segregation has increased slightly since the late 1980s

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

(Orfield et al., 1993). The residential racial segregation of blacks is not simply a by-product of economic segregation; high-income blacks live in areas nearly as segregated as do low-income blacks. The level of income segregation is markedly lower than the level of racial segregation.

The concentration in cities of minority residents is worrisome because "many metropolitan areas are . . . characterized by a set of problems so severe that some see them as threatening the long-term viability of American society" (National Research Council, 1999a:13). The differences in opportunity structures that result from central-city/suburban differences in education, employment, income, and public service quality contribute to the unequal chances many city residents

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

TABLE 2-6 Average Per-Pupil Spending in Large Urban Districts, 1994–95

District

City

State

District Spending

State Spending

Difference in Spending

Districts Spending More than State Average

 

 

 

 

 

Milwaukee City Public Schools

Milwaukee

WI

$6,922

$6,301

$621

Dade County School District

Miami

FL

5,734

5,220

514

Chicago Public Schools

Chicago

IL

6,064

5,553

511

Detroit Public Schools

Detroit

MI

6,953

6,465

488

Memphis City Schools

Memphis

TN

4,421

4,017

404

Los Angeles Unified School District

Los Angeles

CA

5,176

4,799

377

Dallas Independent School District

Dallas

TX

5,133

4,779

354

San Diego Unified School District

San Diego

CA

5,013

4,799

214

Districts Spending "Same" as Statea

 

 

 

 

 

Houston Independent School District

Houston

TX

4,785

4,779

6

Broward County Public Schools

Fort Lauderdale

FL

5,140

5,220

-80

Districts Spending Less than State Average

 

 

 

 

 

Clark County Public Schools

Las Vegas

NV

4,584

4,730

-146

Baltimore City Public Schools

Baltimore

MD

5,915

6,427

-512

Duval County Public Schools

Jacksonville

FL

4,615

5,220

-605

New York City Public Schools

New York

NY

7,617

8,311

-694

The School District of Philadelphia

Philadelphia

PA

5,104

6,565

-1,461

a A difference of ± $100 is counted as "the same."

SOURCE: U.S. Department of Education, 1999a: Tables 94 and 168.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

have to develop their inherent talents and capabilities. Alarmingly, these spatial variations in opportunity are especially exaggerated for blacks and Hispanics, who are especially likely to live in neighborhoods where opportunities are the most limited. In 1990, 17 percent of metropolitan-area blacks and 11 percent of Hispanics (compared with 1 percent of whites) lived in neighborhoods of concentrated poverty (census tracts with 40 percent or more of the households below the poverty level). While 34 percent of the black poor and 22 percent of the Hispanic poor in metropolitan areas lived in these high-poverty neighborhoods, only 18 percent of all poor people did so (Jargowsky, 1997).

Moreover, the problems of central cities and unequal opportunity are getting worse. A 1999 NRC report cities these disturbing trends (National Research Council, 1999a):

  • In 1990 central-city median income was 77 percent of suburban median income, compared with 89 percent in 1960.

  • In 1990, central-city poverty rates were 2.4 times those of suburbs, compared with 1.5 times in 1960.

  • Between 1980 and 1990, per-capita income for whites in metropolitan areas rose by 19 percent, while for blacks it increased by only 13 percent.

  • The number of high-poverty census tracts more than doubled between 1970 and 1990 and the number of people who live in them rose by 92 percent over that time. Blacks have been especially affected in negative ways by this development. Whereas 26 percent of the black poor in metropolitan areas lived in high-poverty census tracts in 1970, in 1990 34 percent did so. The comparable figures for the Hispanic poor were 24 percent in 1970 and 22 percent in 1990.

Conditions in cities and suburbs do not always diverge sharply. There is substantial variation in economic and social conditions across individual suburbs. There are inner-ring suburbs and/or industrial suburbs in many metropolitan areas whose residents face problems and barriers similar to those in central cities, although research on intrametropolitan differences almost always examines central-city versus suburban differences. It is possible that some suburban neighborhoods with low incomes and high poverty levels are even worse off than some central-city neighborhoods, because they share similar problems but may lack the commercial tax base of a central business district. One study found that central cities were actually more prosperous than their surrounding suburbs in nearly a third of metropolitan areas (Ellen, 1999). Central-city/suburban disparities clearly vary by region, with cities in the Northeast and the Midwest relatively worse off in comparison to their suburbs than cities in the South and the West (National Research Council, 1999a: Table 3-3). Cities in larger metropolitan areas are relatively worse off compared with their suburbs than cities in smaller areas (National Research Council, 1999a: Table 3-4). Strategies for change, therefore,

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

cannot uniformly be applied to all cities, but must be adapted to local circumstances.

The diversity of conditions in both cities and suburbs no doubt helps explain why data on the financial condition of urban schools are not easy to discern. It is not immediately apparent that urban schools are funded at lower levels than other schools, although it is frequently assumed that they are. Despite the concentration of costly-to-educate children in urban areas, in 1991–92 (Table 2-5), average per-pupil revenues per urban/central-city student were virtually the same as for suburban/metropolitan students. When these revenue figures were adjusted (by imperfect measures) for differences in costs and student needs, per-pupil revenues in the urban/central-city areas were the same as those in rural areas and 3 percent lower than the suburban/metropolitan average.

Other data suggest that this small difference in the nationwide averages masks much larger differences that exist from state to state. Education Week (1998) calculated per-pupil 1993–94 spending levels for 73 urban districts and compared these averages with per-pupil averages for the state in which the city is located. Counting a difference of ± $100 as "the same," 39 of these 73 urban districts had higher per-pupil average expenditures than their states, 11 had the same, and 23 had lower. Of these 73 districts, 15 are also on the list of super-size districts enrolling more than 100,000 students in 1996 (see Table 2-4). (The 9 other super-size districts are suburban.) Looking at the latest year (1994–95) for which spending data are available for these 15 districts, per-pupil expenditures were higher than state averages in 8, the same in 2, and lower in 5 (Table 2-6).

Moreover, the picture of the resources available in urban districts compared with other jurisdictions depends heavily on the cost-adjustment factors that are used to account for differences in student needs and in geographical cost-of-living levels. The quality of comparative measures of spending depends on how fully these measures reflect underlying cost differences. As discussed in Chapters 4 and 7, there is room for significant improvement in the quality of the cost adjustments currently used to allocate and to report on educational revenues.

School Finance and the Interrelationship of Achievement and Student Background

The fact that student academic achievement is strongly linked with family background, which is in turn is affected by the social, economic, and political environment in which families live, reflects deep societal problems that go far beyond schooling. We reiterate our view that changes in school finance, or school policies more generally, are not likely to solve problems that go far beyond education. At the same time, such change both can and should do more to reduce the nexus between family background and student achievement. Finance reforms will need to focus not only on improving the capacity of schools to meet the needs of disadvantaged students but also on ensuring that such students are

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

prepared to benefit from what schools have to offer—that is, on improving the capacity of the children to learn.

GOAL 3: RAISING REVENUES FAIRLY AND EFFICIENTLY

Raising revenue in a fair manner is important for its own sake, regardless of whether the funds are to be used for education or any other public service. The fact that taxes are compulsory does not give a democratic government license to tax people in an arbitrary or unfair way. Rather, the legitimacy of a democratic government requires that it tax people in a way that they perceive to be fair. In addition, the perceived fairness with which revenues are generated is important for education because it can affect the attainment of other educational goals. For example, if taxpayers thought a particular type of tax was so unfair that they refused to vote for higher taxes, the use of that tax would affect the amount of revenue that could be generated for education.

Efficiency with respect to revenue raising can take on several meanings. First, it may call for revenues to be raised with relatively low administrative costs. Second, following the economists' definition of efficiency, it may call for revenue to be raised in such a way as to minimize unintended behavioral responses by taxpayers who are trying to avoid the burden of the tax. Third, in the local government context, it may refer to how well the pattern of public spending and the taxes that support the spending across local jurisdictions corresponds to consumer preferences.

Two features of the way the United States raises revenue at the state and local level for education have direct implications for the fairness and efficiency of revenue raising. One is the heavy reliance on local school districts for raising revenue. Local revenue raising can promote efficiency in the third sense of supporting spending that is in line with consumer preferences. However, the large variation across districts in their capacity to raise revenue relative to the educational challenges they face requires some districts to impose much heavier tax burdens on their residents than other districts to provide a given quality of education services. Although some of the apparent resulting inequities may be offset in part by compensating differences in state aid to school districts or in local housing prices, undoubtedly some inequities remain. The other aspect is the heavy reliance of education funding on the local property tax, which many people believe imposes a regressive burden on taxpayers.

We have already described the pattern across states and over time in the division of financing responsibilities by level of government. In the following sections, we document the large role of the local property tax and describe the other components of the financing landscape: the efforts of state governments to use state aid to school districts to offset some of the variation in revenue-raising ability across local school districts and the role of the federal government. In

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

Chapter 8 we evaluate the validity of the concerns about the inequities and inefficiencies in the way the country currently finances K-12 education.

Role of the Property Tax

The extent to which local governments in general and school districts in particular rely on the property tax is reported by state in Table 2-7. As the first column shows, property taxes as a percentage of total local taxes in FY 1994–95 averaged nearly 75 percent. The share ranged from nearly 99 percent in New Hampshire, Rhode Island, and Vermont to about 36 percent in Alabama. It was 75 percent or greater for 29 states and less than 60 percent for only 7 states. The second column indicates the extent to which independent school districts (that is, those not a part of municipalities or counties) rely on the property tax. In the United States, property taxes accounted for more than 96 percent of the local taxes for school districts. Only 3 states (Kentucky, Louisiana, and Pennsylvania) have a share less than 90 percent.

Revenues at the state level come primarily from the personal income tax and the general sales tax (Table 2-8). Most states rely on a combination of these two

TABLE 2-7 Local Governments and School Districts' Reliance on the Property Tax

State

All Local Governments

School Districts

Alabama

36.26

100

Alaskaa

80.31

NA

Arizona

72.77

100

Arkansas

64.93

100

California

69.37

99.27

Colorado

64.62

100

Connecticutb

98.86

NA

Delaware

82.24

100

Florida

80.49

100

Georgia

69.01

100

Hawaiic

81.06

NA

Idaho

95.23

100

Illinois

81.04

100

Indiana

89.59

99.82

Iowa

94.25

97.85

Kansas

81.99

100

Kentucky

50.19

64.90

Louisiana

38.92

40.80

Maine

98.26

100

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

State

All Local Governments

School Districts

Marylandb

59.84

NA

Massachusettsb

97.23

NA

Michigan

88.93

99.48

Minnesota

95.47

100

Mississippi

92.14

99.19

Missouri

62.27

94.19

Montana

95.86

100

Nebraska

86.51

99.91

Nevada

61.29

99.48

New Hampshire

99.02

100

New Jersey

97.88

100

New Mexico

52.18

100

New York

61.53

98.21

North Carolinab

74.89

NA

North Dakota

89.44

99.56

Ohio

66.27

98.27

Oklahoma

54.55

99.70

Oregon

83.53

99.40

Pennsylvania

71.02

84.10

Rhode Islandb

98.76

NA

South Carolina

89.23

99.69

South Dakota

80.44

96.84

Tennesseeb

61.16

NA

Texas

77.10

92.24

Utah

74.57

100

Vermont

98.89

99.60

Virginiab

71.62

NA

Washington

58.14

99.84

West Virginia

82.02

100

Wisconsin

95.32

100

Wyoming

79.24

97.96

U.S.

74.18

96.30

NA = not applicable

 

 

a Alaska: Twenty school districts are dependent on the state, other school districts are dependent on boroughs.

b Connecticut, Maryland, Massachusetts, North Carolina, Rhode Island, Tennessee, Virginia: Most school districts in these states are dependent on a city, county, or township.

c Hawaii has one statewide school district.

SOURCE: Bureau of the Census, 1995a: http://www.census.gov/goves/school/95tables.pdf and Bureau of the Census, 1995b: http://www.census.gov/govs/www/esti95.html.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

TABLE 2-8 State Income and Sales Tax Revenues, 1996

State

Individual Incomes Taxes Percentage of Total Own-Source General Revenues

General Sales Taxes Percentage of Total Own-Source General Revenues

Alabama

20.9

19.1

Alaska

0.0

0.0

Arizona

19.3

35.1

Arkansas

23.9

28.3

California

30.0

27.5

Colorado

33.9

19.7

Connecticut

27.2

25.4

Delaware

23.9

0.0

Florida

0.0

46.7

Georgia

32.8

29.6

Hawaii

24.1

34.5

Idaho

26.7

24.5

Illinois

26.4

23.1

Indiana

30.7

25.3

Iowa

26.5

24.3

Kansas

26.5

27.0

Kentucky

24.6

21.2

Louisiana

15.0

21.0

Maine

27.4

25.4

Maryland

32.4

18.6

Massachusetts

39.4

15.3

Michigan

24.1

27.0

Minnesota

32.9

23.1

Mississippi

15.6

38.5

Missouri

29.4

26.5

Montana

20.8

0.0

Nebraska

25.1

24.4

Nevada

0.0

47.0

New Hampshire

3.1

0.0

New Jersey

23.7

21.6

New Mexico

14.2

28.4

New York

40.0

16.0

North Carolina

34.5

20.8

North Dakota

10.2

19.0

Ohio

28.5

24.1

Oklahoma

25.4

20.3

Oregon

42.6

0.0

Pennsylvania

21.4

23.4

Rhode Island

26.0

20.8

South Carolina

25.6

27.1

South Dakota

0.0

32.2

Tennessee

1.5

45.4

Texas

0.0

36.6

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

State

Individual Incomes Taxes Percentage of Total Own-Source General Revenues

General Sales Taxes Percentage of Total Own-Source General Revenues

Utah

28.0

28.7

Vermont

21.6

14.0

Virginia

32.8

15.2

Washington

0.0

46.5

West Virginia

20.1

21.3

Wisconsin

37.6

21.0

Wyoming

0.0

17.1

U.S.

25.4

24.5

 

SOURCE: Bureau of the Census, 1997: http://www.census/gov/govs/state/

revenue sources for about 50 percent of total own-source revenues and, according to Gold et al. (1995), for about two-thirds of the state revenue for primary and secondary education in 1992. The remainder of state revenue for education is from state corporation income taxes and various excise taxes. The mix varies across states: income taxes contribute more than a third of total state revenue in Massachusetts, New York, Oregon, and Wisconsin, and the sales tax contributes well over a third in Florida, Mississippi, Nevada, Tennessee, and Washington. Some states devote or ''earmark" a portion of state revenue to the financing of education: 13 states earmark revenues from the sales tax, 7 from the personal income tax. Although several states have earmarked special revenue sources, such as proceeds from the lottery, for education, the revenues from these sources are typically quite small.

The preceding discussion seems to imply that the property tax is used exclusively by local governments and income and sales taxes exclusively by state governments. However, the correspondence between tax sources and level of government is by no means absolute. In addition to generating revenue from a local property tax, many local governments also generate revenue from income and sales taxes to finance education. In addition, some state governments rely on a statewide property tax for some of their revenue. The recent education finance reform in Michigan, for example, led to what is in effect a statewide property tax system. This overlap in revenue sources makes it essential to distinguish the governmental level at which the revenues are raised (e.g., state or local) as well as the specific taxes used (e.g., income, sales, or property). These distinctions have important implications for the fairness of a state's revenue structure as well as for its efficiency.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×
The Property Tax under Attack

For the past few decades, the local property tax has been under attack. These attacks have taken two forms: (1) school finance cases that have declared many property-tax-based state systems as unconstitutional and (2) taxpayer revolts against the property tax. Plaintiffs in school finance cases have attacked the property tax because of its role in generating inequalities in spending across school districts. Because districts that are blessed with large per-pupil property tax bases can raise any given amount of revenue with lower tax rates than those with smaller tax bases, rich districts find it easier to raise revenue for education than do poor districts. Although it may appear that the property tax is the cause of any resulting differentials in spending across districts, we argue in Chapter 8 that the real culprit is not the property tax per se but rather the fact that any local revenue source is being used. Nonetheless, there is no doubt that the resulting disparities in spending across districts tend to give the local property tax a bad name.

Voters have reacted negatively to the property tax when property values rose rapidly and local governments failed to limit the resulting increases in tax bills. In 1978 California voters passed Proposition 13, a constitutional amendment that limited the local property tax rate to 1 percent and capped the growth of assessed values at 2 percent per year, except when parcels were sold. Massachusetts voters followed two years later with their own tax limitation measure, Proposition 2 1/2, which required municipalities to roll back their local property tax rates to 2 1/2 percent and limited the growth of property tax revenues in each jurisdiction to 2 1/2 percent per year.

While other states have avoided such broad based and restrictive measures, according to an Advisory Commission on Intergovernmental Relations (1995b) report, all but four states impose constraints on local governments' ability to raise revenue and/or to spend money. A total of 30 states limit local government tax rates and 27 states limit tax levies; 8 states limit expenditure growth, including spending on schools. Most states have implemented programs to relieve what they perceive as unfair burdens of the local property tax. The Advisory Commission on Intergovernmental Relations (1995a) reports that, as of 1994, 35 states have implemented circuit breaker programs that provide property tax relief to homeowners and (in some states) renters through a state income tax credit. These programs are generally targeted to individuals with low income or who are elderly. As of 1995, 37 states have responded to the political pressure of voters to reduce property tax burdens more generally through the provision of homestead exemptions that reduce property tax burdens for all homeowners. These various limitation and tax relief measures end up reducing the revenue that can be raised by local governments and school districts for education and other public services.

A central question for the committee is whether it is time to eliminate, or substantially reduce reliance on, the property tax as a major source of revenue for public schools.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×
State Aid to Local School Districts

State-raised revenue for education is typically distributed back to local school districts as state aid, either as basic support or as categorical grants. Basic support comes in three generic forms: flat grants, foundation programs, and guaranteed tax base programs (also called district power equalizing grants). Flat grants are the oldest and the simplest form of aid in that they provide a uniform amount of aid per unit (as measured, for example, by students or teachers). Although the purpose of the flat grant is to ensure some minimum level of education expenditure, historically the grant amounts have been so small that they have not served that function very well. Gold et al. (1995) identify only two states—Delaware and North Carolina—still using flat grants in 1993–94.

A much more common type of school aid is the foundation grant. Foundation aid is similar to flat grants in that it is designed to ensure some basic or foundation level of education spending. However, in practice it differs in two ways. First, the minimum or foundation level of spending is set at a much higher level—one that might represent, for example, the state's view of how much spending would be required for a district to provide an "adequate" level of education. Second, it typically requires that local districts contribute to the foundation spending level in proportion to their capacity to raise revenue for education. In practice this requirement usually means that the amount of state aid (per pupil) given to a district varies inversely with the size of the district's property tax base (per pupil), or by some broader measure of taxable capacity, such as a weighted average of the property tax base and the income of residents. To be more precise, the amount of state aid given to a district is the difference between the foundation spending level and the amount of local tax revenue that the district would generate from its local tax base by taxing itself at a required minimum tax rate. Such aid is lump sum aid, in that the amount of aid does not vary with the district's chosen level of spending. Districts would, however, typically be free to spend more than the foundation amount. As of 1994, 22 states had foundation programs that required local effort and 18 states had foundation programs that did not require local effort (Gold et al., 1995).

Guaranteed tax base or district power equalizing grants are matching grant programs. In the standard program, the state pays for a share of the expenditures in each district, and the share, or the matching rate, varies inversely with the size of the district's property tax base. The aim of a guaranteed tax base program is to make it possible for any district, whatever its tax base, to spend the same amount of money as a district with some target tax base at any chosen tax rate.8 Each district would be free to tax itself at whatever rate it chose with the assurance that

8  

 While this goal has superficial appeal, economists are quick to emphasize that it treats the size of the tax base as if it is exogenous, that is independent of the district's decision about how much to spend on education. In addition, it may not lead to the desired goal of wealth neutrality.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

the combination of the revenue it generated locally at that rate and the amount of state aid it received would equal what the district with the target tax base could raise at that tax rate. The logic of such a program is that very wealthy districts—those with tax bases larger than the target base—would face negative matching rates and, instead of receiving aid, would have to pay money to the state. That is, the price to them of raising and spending an additional dollar on education would exceed one dollar. In practice, however, the guaranteed tax base formula is typically overridden so that all districts receive some small amount of state aid.

In contrast to aid for general support, categorical aid is given for specific expenditure categories, such as special education, transportation, buildings, and equipment. Categorical aid programs frequently do not incorporate capacity measures into the distribution formulas. However, state categorical aid for special education, as well as many of the federal categorical aid programs, are targeted toward districts with disproportionate numbers of needy students, where need is defined by learning disability, other physical disability, or poverty.

The Federal Role

The federal government has a relatively small direct role as well as a large indirect role in financing primary and secondary education. Direct programs of federal aid are designed to help achieve goals of greater equity and, more recently, higher student performance. In addition to the traditional federal emphasis on aid for disadvantaged students, new funds have been provided through the Goals 2000 program ($668 million in FY 1998) for grants to assist states with their programs to raise the educational achievement of all students (U.S. Department of Education, 1999a: Table 361). The small amount of these funds belies the larger role for the federal government envisioned in the Goals 2000 legislation. In that role, the federal government would use the funds appropriated for this purpose to induce the states to work toward national educational goals.

The federal government plays a much larger but indirect financing role through the deductibility of state and local income and property taxes from personal income subject to federal taxes. The deduction of state and local property taxes alone amounted to about $18 billion in 1999 (Office of Management and Budget, 1999). Because this tax break is in the form of deductions, the value to individuals rises with the income of the taxpayer and is dependent on the itemizing of deductions. The value to individuals also depends on state and local tax burdens, which vary across state and districts. Deductibility is a benefit to school districts in that it lowers the effective tax price to local taxpayers for education and therefore may make them more willing to spend on education. However, the distributional effects of providing assistance in this manner are worth noting. Greater benefits accrue to districts with larger proportions of taxpayers who itemize their deductions. Such districts are typically the ones with wealthy tax-

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

payers who own their own homes. Few benefits accrue to large cities populated disproportionately by low-income renters.

Thus, the direct federal role has historically been very small and targeted to specific groups. Recently the federal government has tried to play a larger role through the adoption of funding mechanisms designed to influence how states and districts might go about improving the overall quality of education. A major question, addressed in Chapter 8, is whether it is time to expand the federal role—especially on the financing side.

STRATEGIES FOR MEETING THE GOALS

Policy makers can alter school finance systems in four generic ways as they attempt to drive the education system toward greater achievement and more efficiency. Which of these broad generic strategies are preferred depends on policy goals, judgments about the efficacy of various strategies to achieve those goals, and an understanding of the unintended side effects of various strategies.

During the final third of the twentieth century, education finance reformers emphasized a strategy of reducing funding inequities and (more recently) inadequacies among school districts. This reform strategy was consistent with their dominant objective at the time, which was to reduce the large fiscal disparities resulting from the tradition of local funding of education. Since significant disparities and inadequacies remain, this strategy will continue to be of interest, although its focus may need to change given the new interest in enhancing student achievement.

The generic strategy of reducing inequities and inadequacies in school finance also applies to the goal of raising revenues fairly. On the revenue side of the finance system, this strategy might be pursued via policies aimed at altering the level of government (e.g., local, state, or federal) at which revenues are raised or altering the types of tax (e.g., property, income, or sales tax) or other revenue sources that are used. However, any policy changes designed to enhance fairness in revenue raising will also need to be evaluated as well in terms of their effects on the efficiency with which revenues are raised and education is provided.

Meeting the new challenge of aligning school finance with the goals of enhancing achievement for all students and reducing the nexus between family background and student achievement will undoubtedly require increased attention in the years ahead to additional strategies for reforming school finance. One possible strategy is investing more resources in developing capacity. This refers not only to the capacity of the formal education system to provide services but also to the capacity of students to learn. Investing in capacity-building will facilitate the achievement of the goals only if the investment will generate greater future returns in the form of student achievement than will spending the money in other ways. As is the case with any investment policy, the resources to be

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
×

invested might represent new funds or funds transferred from some other, presumably less effective, use.

A third generic strategy for school finance reform would emphasize altering incentives to make performance count. This strategy embraces changes in incentives that are designed to operate primarily within the existing system of governance. Changes in incentives that might result from major changes in governance and management structures, such as the introduction of a significantly greater role for schools or parents (or both) in finance decisions, are reserved for the fourth strategy. Strategy 3 emphasizes the development of accountability and funding systems that give teachers, schools, or students incentives to focus on student achievement.

A fourth generic strategy would focus on empowering schools or parents or both to make decisions about the use of public funds. This strategy embraces finance reforms that would promote major changes in governance and management by shifting the locus of decision making. It represents the most significant break with current school finance practice because it promises significant change in who gets to decide how education dollars are spent. Not surprisingly, then, it can be expected to arouse the most heated passions, with contentiousness related to how far particular policy options consistent with the strategy (school-site autonomy, for example, versus vouchers usable at both public and private schools) move decision making away from familiar patterns. It is likely, therefore, that even more than with the other strategies, the position individuals take on policy options consistent with strategy 4 will typically rest on more than the evidence about what the strategy might contribute to fairness and productivity. Views about the desirability of shifting decision making on the grounds that it will increase student achievement are balanced with additional considerations, such as how broken the current educational system is perceived to be, support for the tradition of public education, and attitudes toward the freedom for families to choose the children with whom their children will associate.

These four generic strategies reflect the broad choices available to policy makers as they debate specific policy options for reforming education finance programs. The four strategies do not encompass every specific policy that might be proposed for improving the finance system,9 nor do policy options fit neatly and unambiguously within one or another strategy as defined here. There is also

9  

 Nor do they directly address many reform strategies, such as changes in curriculum or the way it is taught, that are not primarily financial in nature but that people closely involved in the provision of education services might deem crucial to educational improvement. Likewise, they do not address changes in governance, such as the recent moves in some states to give direct control of selected big city school districts to mayors. Mayoral control (being tried in Boston, Baltimore, Cleveland, and Chicago) clearly alters lines of accountability, but there is nothing inherent structurally in this governance chance that necessarily alters the distribution of financial resources.

Suggested Citation:"2 Setting the Stage." National Research Council. 1999. Making Money Matter: Financing America's Schools. Washington, DC: The National Academies Press. doi: 10.17226/9606.
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an element of artificiality in the separation of the four strategies, in that policy makers do not and should not consider strategies and options in isolation. Finance policies ought to reflect the interrelatedness of the various facets of the finance system and the possibility (some would say likelihood) that it will take many complementary changes for reform to have its intended results. Nonetheless, the strategies are useful as a framework for organizing the discussion later in the report of major options for changing the school finance system.

To provide the foundation for the analysis of how these generic finance strategies might be harnessed to the goals for a good finance system, we turn now to a detailed discussion of the concepts of fairness and productivity as they have played out over time in the legislative, legal, policy and scholarly arenas.

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Making Money Matter: Financing America's Schools Get This Book
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The United States annually spends over $300 billion on public elementary and secondary education. As the nation enters the 21st century, it faces a major challenge: how best to tie this financial investment to the goal of high levels of achievement for all students. In addition, policymakers want assurance that education dollars are being raised and used in the most efficient and effective possible ways. The book covers such topics as:

  • Legal and legislative efforts to reduce spending and achievement gaps.
  • The shift from "equity" to "adequacy" as a new standard for determining fairness in education spending.
  • The debate and the evidence over the productivity of American schools.
  • Strategies for using school finance in support of broader reforms aimed at raising student achievement.

This book contains a comprehensive review of the theory and practice of financing public schools by federal, state, and local governments in the United States. It distills the best available knowledge about the fairness and productivity of expenditures on education and assesses options for changing the finance system.

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