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.



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Making Money Matter: Financing America's Schools 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.

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Making Money Matter: Financing America's Schools 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).

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Making Money Matter: Financing America's Schools 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.

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Making Money Matter: Financing America's Schools 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.

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Making Money Matter: Financing America's Schools 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

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Making Money Matter: Financing America's Schools 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

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Making Money Matter: Financing America's Schools 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.

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Making Money Matter: Financing America's Schools 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

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Making Money Matter: Financing America's Schools 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

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Making Money Matter: Financing America's Schools 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

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Making Money Matter: Financing America's Schools 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

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Making Money Matter: Financing America's Schools 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

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Making Money Matter: Financing America's Schools 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.

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Making Money Matter: Financing America's Schools 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

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Making Money Matter: Financing America's Schools 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.

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Making Money Matter: Financing America's Schools 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.

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Making Money Matter: Financing America's Schools 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.

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Making Money Matter: Financing America's Schools 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-

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Making Money Matter: Financing America's Schools 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

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Making Money Matter: Financing America's Schools 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.

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Making Money Matter: Financing America's Schools 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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