Part II
Fairness and Productivity in School Finance

School finance policy was under intense scrutiny in the last third of the 20th century. Until comparatively recently, reformers concentrated on a strategy of reducing large disparities in available revenues and spending levels among school districts, which were the legacy of a school finance system originally built on local control. Using school finance policy to improve educational outcomes is a relatively new objective. Identifying policy options that will foster this objective hinges on having good information about how to use resources to improve the performance of schools and students. Researchers have increasingly focused their efforts on developing such knowledge. At present, however, the results are best viewed as tentative and contingent.

The recent history of efforts to understand and improve fairness and productivity, the subject of Part II, helps explain why existing finance policies took the shape they did and provides lessons that will be instructive in Part III in evaluating current proposals for reforming education finance.



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Making Money Matter: Financing America's Schools Part II Fairness and Productivity in School Finance School finance policy was under intense scrutiny in the last third of the 20th century. Until comparatively recently, reformers concentrated on a strategy of reducing large disparities in available revenues and spending levels among school districts, which were the legacy of a school finance system originally built on local control. Using school finance policy to improve educational outcomes is a relatively new objective. Identifying policy options that will foster this objective hinges on having good information about how to use resources to improve the performance of schools and students. Researchers have increasingly focused their efforts on developing such knowledge. At present, however, the results are best viewed as tentative and contingent. The recent history of efforts to understand and improve fairness and productivity, the subject of Part II, helps explain why existing finance policies took the shape they did and provides lessons that will be instructive in Part III in evaluating current proposals for reforming education finance.

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Making Money Matter: Financing America's Schools 3 Equity I—Spending on Schools The United States is a country built on a perception of itself as a "land of opportunity" with "liberty and justice for all." Education has long been viewed as the major route to a good society and to improving the life chances of individual citizens. "Faith in the power of education . . . has helped to persuade citizens to create the most comprehensive system of public schooling in the world'' (Tyack and Cuban, 1995:3). Paradoxically, however, throughout the nation's history, Americans have tolerated great disparities in access to this pathway to opportunity. Until the last half of the 20th century, these disparities were often unacknowledged, hidden behind an aggregate picture of progress. This apparent march of progress, though, left many people behind. At mid-century (Tyack and Cuban, 1995:22): "A probe behind aggregated national statistics and the upbeat rhetoric of [school reformers] reveals major disparities in educational opportunities. These inequalities stemmed from differences in place of residence, family occupation and income, race, and gender, and from physical and mental handicaps. At mid-century American public education was not a seamless system of roughly similar common schools but instead a diverse and unequal set of institutions that reflected deeply embedded and social inequalities. Americans from all walks of life may have shared a common faith in individual and societal progress through education, but they hardly participated equally in its benefits." As Tyack and Cuban indicate, manifestations of inequality were everywhere. In 1940 huge differences existed between rural and urban schools, magnified by large regional differences in educational funding. Both educational spending on and the educational attainment of rural children lagged behind their urban coun-

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Making Money Matter: Financing America's Schools terparts. Two out of three blacks resided in rural areas, overwhelmingly in the South where regional poverty exacerbated racial discrimination. Among whites living in cities, whether or not students attended high school was strongly influenced by the income level of their families. Programs for children with disabilities and those with other special educational needs served fewer than 1 percent of all students in 1938. Compulsory attendance laws frequently excluded children with disabilities. Inattention to inequality in education was about to change. The catalyst was the U.S. Supreme Court's decision in Brown v. Board of Education , 347 U.S. 483 (1954), declaring racial segregation in public schools illegal. The justices' declaration that "it is doubtful that any child may reasonably be expected to succeed in life if he is denied the opportunity of an education" became the springboard for a broad assault on differences in educational opportunity related to the socioeconomic, racial, and physical characteristics of students and their families. Much of the history of school reform in the latter half of this century, especially in the 1960s and 1970s, had as a central concern reducing educational disparities. Many, though certainly not all, of these disparities related to money. Readily apparent and large differences in spending on education from district to district became one major target of change. Reformers sought new state and federal programs to provide additional funds for educating previously underserved or unserved groups. They also launched legal attacks on the underlying theory and structure of school finance. The existing system, which relied heavily on localities whose wealth and willingness to tax themselves varied greatly, appeared to make the quality of a child's education dependent on where he or she happened to live. Although, as we shall see, the relationship between spending on education and the quality of schooling has been the subject of much debate, reformers nevertheless argued that money provided the most "convincingly quantifiable" standard for judging the availability of education across districts. They further argued on grounds of fairness against postponing reform until the cost-quality debate could be settled. As Coons et al. (1970:30) put it: "if money is inadequate to improve education, the residents of poor districts should at least have an equal opportunity to be disappointed by its failure." This chapter explores the pursuit of equity in school finance since mid-century, which until recently emphasized reducing spending disparities tied to the place of residence and increasing spending to meet special educational needs. The story is complicated to tell chronologically, because reforms aimed at revising the fundamental reliance of American schools on locally raised revenues (which have largely been pursued through the courts) have proceeded simultaneously with legislative and legal efforts to overcome specific education inequities through more piecemeal categorical-type programs. Examining the legal attack on traditional school finance mechanisms has the advantage of crystallizing a number of key finance and constitutional issues; so, after some comments on the meaning of equity, we take up that strategy first. We then describe a

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Making Money Matter: Financing America's Schools number of other developments in the past half-century related to the equity of educational spending. Finally, and most importantly for the subsequent policy discussion in Part III, we assess what all this has accomplished in terms of reducing educational inequities as defined by spending disparities and in terms of equity issues as they are being reconceptualized today. What we will see is that much has been accomplished in terms of extending educational opportunities to all students, but that great disparities in education spending still remain. The biggest disparities, those among states, remain largely untouched by reforms that have focused on individual state finance systems. Inequalities in finance have proven stubbornly persistent, in large part because reducing or eliminating them requires steps that fly in the face of other values Americans hold dear, such as local control of schools and the freedom of parents to provide for their children. Moreover, dissatisfaction has grown with school finance approaches that fail to address directly problems of growing public concern, notably the academic achievement levels of American students and the worsening conditions facing children who live in some central-city neighborhoods. The concept of equity motivating school finance reform today is shifting in emphasis from differences in the amount of money spent to the adequacy of the education that this money provides. The next chapter explores this newer approach to equity and the possibilities and challenges it poses for school finance. THE MEANING OF EQUITY Equity, a concept embodying notions of justice, impartiality, and fairness, is a widely shared value in American society. Yet equity lends itself to a variety of specific definitions reflecting the different goals that can be sought under the "equity" banner. Equity may, for example, involve equality (an equal distribution of something), but it need not (Monk, 1990; Putterman et al., 1998). An equitable distribution may actually involve substantial inequality, as for example when "extra" resources are provided to a group believed to have extraordinary needs. In this case, equity may be seen as providing unequal inputs in order to achieve equal outputs or outcomes. Different definitions of equity mix and weigh central distinctions in differing ways. Researchers, legislators, lawyers and judges, and the public have used various mixes as they debate equity-based reforms, resulting in conflicting views about what constitutes fairness. Therefore, it is essential to clarify the definitional issues and to indicate how different equity definitions influence school finance discussions. Understanding the various meanings and goals that are associated with different definitions of equity can illuminate the accomplishments and shortcomings of prior attempts to make school finance more equitable and why this objective has proven so difficult to accomplish.

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Making Money Matter: Financing America's Schools Berne and Stiefel (1984, 1999) have identified five key distinctions that can be drawn among equity definitions as they are applied to school finance systems: Who is the focus of concern: school-age children, taxpayers, or both? What is the unit of analysis: the nation, states, districts, schools, or students? Which stage in the "production" of education is emphasized: inputs (dollars and/or real resources), processes, outputs, or outcomes? Which groups are of special interest: students with low income, minority status, disabilities; low-income or low-wealth taxpayers? How is the equity of the school finance system being evaluated: ex ante (judged by the equity of statutory design elements) or ex post (judged by the actual outcomes that result from behavioral changes of school districts as they respond to the design elements of a school finance system)? The answers to these questions embodied in school finance systems have evolved as public debate has occurred over the nature of spending and outcome differences in education and as reformers attempted to find remedies for perceived inequities that could be successfully enacted through the political process. School finance equity is not a new concern. Efforts to link methods of school finance to the fairness of the educational system can be traced back to the beginning of the 20th century and the work of Ellwood P. Cubberley (Guthrie et al., 1988:3). But school finance inequities came into sharp focus in the late 1960s, as education reformers began to realize that the promise of educational opportunity offered by the Brown decision was being thwarted by unequal perpupil expenditures. Desegregation alone was insufficient to address the "inequalities in education [that] continue to be visited upon Negro children, especially in large cities," because of spending disparities (Wise, 1968:3). Interestingly, urban problems rather than rural poverty now loomed large, reflecting the mass migration of blacks to the cities following World War II. School finance inequities linked to race were now a national, and not primarily a southern, issue. In the aftermath of Brown, reformers also became increasingly intolerant of the slow pace with which the executive and legislative branches of government moved to equalize opportunities. For the first time, courts became central players in school finance. In this area as in others, individuals and groups turned increasingly to the judicial system to obtain public benefits they were unable to gain in the political arena. Although legislative and executive branch officials generally determine how complex school finance issues are resolved, since about 1970 the framework for their policy making has increasingly been influenced by the rulings in court cases. Carr and Fuhrman (1999) explore the political reasons why school finance reformers have frequently found the courts more receptive to their arguments than the executive and legislative branches of government.

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Making Money Matter: Financing America's Schools Our examination of equity in educational finance begins by tracing the development of school finance litigation carried out in its name. School finance reform was strongly influenced by the success in the courts of an approach to equity called "wealth neutrality," which concentrated attention on the spending disparities between school districts in a given state and in particular showed how they related to the variation in property tax bases (Minorini and Sugarman, 1999). It emphasized student equity, specifying that no relationship should exist between the education of children and the property wealth of the district in which they reside, while also embodying the concept that taxpayers should be taxed at equal rates to fund equal education (generally defined as equal spending) per child.1 The wealth-neutrality approach has focused heavily on inputs to the educational system; both ex ante and ex post measures of it were developed. PURSUING FINANCE EQUITY THROUGH THE COURTS Efforts to reform school finance through the courts have had two distinguishing features. First, until recently, they focused mainly on attacking geographically based disparities in school spending that result from dependence on local wealth-based property taxes. Second, school finance litigation has taken place primarily in state courts under state law, a surprising venue given that federal courts and federal law have played the central role in lawsuits concerning other aspects of public education, such as school desegregation and student rights to free expression. The reasons reformers focused on wealth-based disparities in education spending and pursued their ends in state courts lie in two major events of the late 1960s and early 1970s that had immense influence on how equity in education finance was defined and pursued in the ensuing decades. The first was the publication of Equality of Educational Opportunity (Coleman et al., 1966). The second was the California Supreme Court's decision ruling against the state and its method of funding education in Serrano v. Priest (Serrano I), 487 P.2d 1241 (Cal. 1971). Equality of Educational Opportunity set off an academic and public debate that continues today by calling into question the relationship between resource equality and equality of educational outcomes with its finding that students' 1    This concept of equity for taxpayers differs from the concept of taxpayer equity typically found in the public finance literature. From a public finance perspective, a system would be judged fair to taxpayers on the basis of either an ability to pay or a benefit principle, both of which are defined in Chapter 8. In general, neither the courts nor advocates nor researchers in school finance have focused on the public finance concepts of equity. If they had, the remedies proposed or legislated for taxpayers might well have been quite different, giving attention to patterns of public finance incidence, such as progressive, regressive, or proportional tax burden, that have not been much considered in the development of school finance formulas. See Chapter 8 for a further discussion of taxpayer equity issues from a public finance perspective.

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Making Money Matter: Financing America's Schools family and other background characteristics were more important than school resources in determining student achievement. While its findings about the role of schools were then and remain controversial (and are increasingly being questioned by scholars evaluating new evidence with new analytical tools), uncertainty over the link between resource and outcome inequalities encouraged challengers of school finance systems to focus on the basic fairness of spending disparities (and thus on school inputs) rather than attempting to link spending levels to specific educational outcomes. Serrano I was the first successful state court case related to state school finance equity. Based on wealth-neutrality arguments, state court judges in California overturned the state's existing system of school finance. Significantly, in the light of what would soon transpire in the U.S. Supreme Court, plaintiffs claimed that California's wealth-based system for raising educational revenues violated the equal protection clauses of both the U.S. Constitution and the California constitution. Dependence on local property taxes as a primary source of school funding, they argued, resulted in average per-pupil spending differences in the 1969–70 school year ranging from $407 to $2,586 in elementary school districts to $722 to $1,761 in high school districts (Franklin, 1987). San Antonio Independent School District v. Rodriguez, 411 U.S. 1 (1973), made some of the same arguments as did Serrano I on behalf of a class of children throughout the state of Texas living in districts with low per-pupil property valuations. It differed, however, in that the case was brought in federal court and relied on the U.S. Constitution alone. Plaintiffs were successful in a lower court, and it appeared for a short time that the U.S. Constitution would indeed play a central role in shaping America's school finance system. However, Rodriguez was rejected on appeal by the U.S. Supreme Court, in part on the grounds that education was not a "fundamental interest" under the U.S. Constitution that warranted breaching long-standing patterns of federalism and involving the federal courts in state school finance issues. While Rodriguez closed the door to school finance reform via the federal courts, Serrano I opened one in the state courts. Although the California Supreme Court emphasized the U.S. Constitution's Fourteenth Amendment in its ruling, a few additional words noted that the state constitution's equal protection clause also was applicable (Serrano I, 1971:1249, note 11). In its 1976 decision evaluating the sufficiency of the legislature's response to Serrano I, the state supreme court explicitly held that the federal equal protection analysis it had advanced in Serrano I was equally applicable to the California constitution's equal protection clause (see Serrano v. Priest (Serrano II), 557 P.2d 929, Cal. 1976). Serrano thus paved the way for widespread legal challenges to school finance systems on the basis of the wealth-neutrality principle, while Rodriguez ensured that school finance litigation would flourish in state rather than federal courts and that state-by-state rather than national solutions to finance equity concerns would be pursued.

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Making Money Matter: Financing America's Schools State constitutions provided grounds for school finance suits because most contain one or more provisions that either parallel the U.S. Constitution's equal protection clause or have been interpreted to afford similar protections (Williams, 1985). In addition, state constitutions, unlike their federal counterpart, contain a variety of so-called education clauses specifying education as a state function and requiring legislatures to provide a public school system that is described in various ways, often including "thorough and efficient" or "ample." 2 Numerous lawsuits followed in Serrano's wake. By 1998, legal cases had been brought against school finance systems in 43 states (Minorini and Sugarman, 1999). In 19 states, supreme courts found school funding systems unconstitutional. Litigation or the threat of litigation sometimes spurred changes in state financing systems even when there was no formal court order present. In nine states (in 1998) where plaintiffs lost their initial cases, further complaints were filed. Plaintiffs who won in state supreme courts frequently found themselves back in court again and again, challenging the remedies crafted by state legislatures. Here, too, developments in California forecast what was in store in many states: repeated appeals to courts to overturn legislative responses to court orders. In Serrano II, the California court not only upheld its prior decision based exclusively on state rather than on federal constitutional grounds but also held that school finance legislation passed in response to Serrano I was insufficient. (It failed to meet the court's standard for equity, which required that differences in per-pupil spending, exclusive of categorical aids and programs for children with special educational needs, such as disabilities or limited proficiency in English, be no greater among most districts than $100 in 1971 dollars.) New Jersey, perhaps the most infamous example of repeated returns to court, went 25 years from the plaintiffs' first supreme court victory (Robinson v. Cahill (Robinson I), 303 A.2d 273, N.J. 1973), to what appears to be the final settlement in the successor case (Abbott v. Burke, 710 A.2d 450, N.J. 1998), while in West Virginia legal challenges begun in 1979 were still subject to litigation in 1998. Legal Theories in Support of Reform The wealth-neutrality principle successfully argued in Serrano I was not the first legal theory put forward by scholars and legal activists hoping to attack school finance inequity in the courts. All early reformers focused their attention on the U.S. Constitution's Fourteenth Amendment provision that states not deny to individuals "equal protection of the law," but they developed differing notions 2    State education clauses are collected in an appendix to Hubsch (1992). Some scholars (McUsic, 1991; Thro, 1993) have attempted to categorize state education clauses based on their wording so as to be able to predict results in school finance cases, but there appears to be little correlation between the language per se and the likelihood of success in a given suit (Underwood, 1995).

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Making Money Matter: Financing America's Schools of what equal protection might require. In addition to wealth neutrality, proposals included ideas such as one scholar, one dollar; geographic uniformity; and unequal student need. Wise (1968:4) linked school finance to the work of Coleman and others on equal educational opportunity by asking "whether the absence of equal educational opportunity within a state, as evidenced by unequal per-pupil expenditures, may constitute a denial by the state of the equal protection of its laws." His theoretical standard—that the quality of a child's education in the public schools of a state should not depend on where he or she happens to live—became a central argument in Serrano-type cases. Drawing on two important judicial developments in the 1960s (school desegregation and reapportionment cases), he argued that public education was a "fundamental interest" for equal protection purposes and that a standard of one scholar, one dollar (similar to the one man, one vote principle of the reapportionment cases) should apply to education spending. Looking at the same unequal spending patterns, Horowitz (1966; Horowitz and Neitring, 1968) turned to a different area of the law from which he developed a similar principle of geographic uniformity. Horowitz argued that, like a state's law governing murder, school spending should not vary within a state based on geography alone. Unlike the one scholar, one dollar principle, however, which seemed to imply uniform per-pupil spending statewide, Horowitz's principle would permit district-to-district spending differences that might result, for example, from a legislative decision to spend more on children with disabilities or at-risk children, who might not reside in equal proportions in all districts. Some legal aid lawyers who tackled the issue found both the Wise and Horowitz principles ill-suited to their purposes. They developed an alternative theory that focused primarily on unequal student need —and the resulting imperative, as they saw it, to spend more than average on the schooling of low-achieving children from low-income families, many of whom now lived in urban areas. The basic thrust of the legal aid lawyers' need-based constitutional claim was that rich and poor children have a right to have their educational needs "equally" met. This principle would not just allow but would in fact require unequal spending in the name of equity. This need-based constitutional claim was actually the first to be litigated, but courts found it insufficient to justify a ruling against school finance systems, in part because it was then seen as judicially unmanageable. Federal district courts in Illinois (McInnis v. Shapiro , 1968) and Virginia (Burrus v. Wilkerson, 1969) rejected the claimants' theory on the grounds that they could not discern judicially manageable standards to gauge what students' needs were and whether they were being met. On appeal, the U.S. Supreme Court affirmed both lower court rulings without comment.3 3    See McInnis v. Shapiro, 293 F. Supp. 327 (N.D. Il. 1968), aff'd sub nom., McInnis v. Ogilvie, 349 U.S. 322 (1969); Burrus v. Wilkerson, 310 F. Supp. 572 (W.D. Va. 1969), aff'd per curiam, 397 U.S. 44 (1970).

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Making Money Matter: Financing America's Schools At about the same time, Coons, Clune, and Sugarman (Coons et al., 1969, 1970) developed yet a fourth legal strategy for attacking school finance inequities, one which later came to be referred to as fiscal or wealth neutrality. They cast the key shortcoming of America's school finance system in a new way: the constitutional evil was that some school districts had little property wealth to tax in order to support their local schools, whereas other districts had lots of it. Although states offset some of the wealthier districts' advantage through a variety of state aid formulas designed to ensure all pupils some minimum level of spending, enormous wealth-based disparities in spending remained. Furthermore, less wealthy districts tended to impose on themselves higher tax rates per dollar of assessed value of property than did their wealthier counterparts. Yet despite the greater "effort" made through higher tax rates (and notwithstanding the state aid they received), property-poor districts had less money per pupil to spend. This wealth discrimination, argued the Coons team, was unconstitutional. They dubbed their core legal principle Proposition I: the quality of public education, measured most commonly by looking at dollar inputs, may not be a function of wealth other than the wealth of the state as a whole. Proposition I, or wealth neutrality, appeared to offer several legal and political advantages over the other theories that might undergird school finance challenges: it could be readily measured and would be relatively easy for the courts to apply, unlike the need-based theory of the legal aid advocates; it left room for the state to choose among several finance options; and it allowed geographic-based differences in spending. For example, if two districts were equally wealthy, it would not be unconstitutional for one to choose to spend more than the other by taxing itself more. This held out hope for reducing the political battles over school finance, which for a long time had pitted less wealthy districts against wealthier ones as they contested for state funds. To demonstrate how a new school finance scheme could meet their principle of fiscal neutrality and yet tolerate geographically different spending levels, the Coons team developed an ex ante measure of equity, which, they argued, would be achieved by state aid that was district power equalizing.4 Such aid promotes equity in the ex ante sense that districts levying the same tax rate would have the same amount to spend, regardless of their property tax wealth. Wealth neutrality was no panacea for all the school finance ills perceived by critics of the existing system. Some objected to district power equalizing, arguing that a child's education should not depend on the willingness of voters in the community to make a certain tax effort in support of education. Advocates for poor children living in big cities found wealth neutrality unattractive because, in their view, it did not sufficiently address the particular needs of urban residents. 4    The measure can be mathematically equivalent to a percentage equalizing funding system, which had existed before in impure forms in New York, for example, but it was seen as new in the 1970s.

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Making Money Matter: Financing America's Schools The economic downturn of the early 1980s and then the shifting of public attention from equity to quality concerns threw into question the extent to which even these early signs of progress were continued. Comparing data from 1985–86 to data from 1976–77, Schwartz and Moskowitz (1988) found that fiscal equity in terms of both horizontal equity (treating equally situated children equally) and fiscal neutrality had not changed significantly over that period. Somewhat later, Wyckoff (1992), comparing data from 1980 to 1987, found that while fiscal neutrality was stable, horizontal equity improved modestly. Recent research seeks to gauge the overall impact of three decades of school finance reform efforts. Because of data limitations (i.e., the lack of comparable measures of property wealth among districts across states), multistate assessments of the impact of finance reform focus on the reductions in spending disparities across districts rather than attempting to measure changes in the wealth neutrality of spending. The most comprehensive research on changes in spending disparities over time appears in a series of papers by Evans, Murray, and Schwab (Evans et al., 1997, 1999; Murray et al., 1998) investigating the impact of judicially mandated school finance reform. They examine the distribution of spending within states as well as the average level of spending across states, using data for the more than 10,000 unified elementary and secondary school districts at 5-year intervals over the 20-year period 1972–1992.7 They also use econometric modeling to explore the effects of court-ordered finance changes. Evans et al. (1999) found that disparities were reduced noticeably over that period in states in which courts mandated school finance reform. Using four different measures of inequality, they found that reform in the wake of a court decision reduces spending inequality within a state by 19 to 34 percent. Their findings are consistent with the results of case studies in individual states that have measured reductions in spending disparities after court-ordered reform (e.g., Joondeph, 1995, who examined Arkansas, California, Connecticut, Washington, and Wyoming and Adams, 1997, who examined Kentucky). Evans et al. (1999) further found that court-ordered reform reduces inequality by raising spending at the bottom of the distribution while leaving spending at the top unchanged. As a result of court-ordered reform, spending rose by 11 percent in the poorest school districts, rose by 7 percent in the median district, and remained roughly constant in the wealthiest districts. Court-ordered finance reform led states to increase spending for education and leave spending in other areas unchanged, and thus by implication states funded the additional spending 7    For comparability purposes, their study omitted districts that were not unified (i.e., districts that included only elementary or secondary grades), data from Montana and Vermont (which have few or no unified districts), and data from Hawaii (with its state-based system) and the District of Columbia (which is the sole system in its jurisdiction).

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Making Money Matter: Financing America's Schools on education through higher taxes. As a consequence, in states where courts ordered reform, the state's share of total spending rose. Evans et al. examined the impact of court-mandated reform on low-household-income districts to shed further light on progress toward one key objective of education finance reformers: to sever the link between the ability to pay for education (as measured in terms of wealth or income) and actual spending. For the most part, the literature has focused on the impact of court decisions on low-spending and high-spending districts. Because spending and income are only imperfectly correlated, more direct evidence of the effect of court action on districts in which household income is low is useful. Evans et al. found that, following court-mandated reform, total revenues rose significantly in the poorest districts, those in the lowest quartile of household income. All of the increased revenues came from state aid, and some of the state aid provided tax relief to poor districts (that is, these districts reduced their own spending somewhat, but by less than the amount of state aid they received). These results imply that court-mandated finance reform reduced the covariance between income and spending on education in a state. The method and findings are similar to the work of Card and Payne (1997), who also found that finance reform has weakened the link between income and spending.8 Evans et al. (1999) also looked at the impact of court-mandated reform on spending for black and white students. Because black students tend to live in low-household-income districts, court-ordered reform would be expected to redistribute resources toward black students. This is in fact what Evans et al. found for state aid; it increased by an estimated $664 per student (in 1992 dollars) following reform. However, since districts, especially low-household-income ones, substitute state aid for their own revenues to some extent, total pupil revenue for black students increased by $448 while per-pupil revenues for white students increased by $575.9 Court-mandated reform has therefore changed state school finance systems in the general direction that many reformers hoped for. Even without court orders, states have also sometimes moved in similar directions,10 as we described previously, for example, in Michigan. Although litigation and legislation have apparently generated more equitable state finance systems in some states, it is far from clear that the past three decades 8    Given the importance of the wealth-neutrality objective in school finance litigation, it would be desirable to examine changes in the relationship between property tax wealth and spending. Unfortunately, comparable measures of taxable wealth do not exist on a nationwide basis, so researchers generally use resident income as an imperfect proxy. 9    These estimates should be interpreted cautiously since the estimates of many parameters in the underlying equations were estimated imprecisely. 10    We do not attempt to examine here how courts and legislatures may work together in changing the education finance system, thus confounding the issue of causation (see Fischel, 1998).

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Making Money Matter: Financing America's Schools of reform efforts have reduced overall disparities in spending on elementary and secondary education in the nation as a whole. Again, the most comprehensive evidence comes from the Evans et al. studies, who found, as we shall see, that not much changed on average during the 1972–95 period. Before reporting these results, however, we should note that it is possible that analyses using more recent data may find more signs of improvement. In carrying out its own studies on funding gaps, the U.S. General Accounting Office (1997; 1998a; 1998b) also had to rely on the latest available data, which were from the 1991–92 school year. GAO contacted state officials to determine the extent to which states had changed their targeting efforts or state share of school funding between 1991–92 and 1995–96:24 states reported targeting changes (presumably in the direction of more targeting on low-wealth districts), and 6 of these also reported making increases of 10 percent or more in their state share of education funding. Between 1972 and 1992, however, Evans et al. (1999) found little improvement in most measures of spending equity, although overall spending per pupil grew significantly and the state shares of funding increased (Table 3-1). The first panel of Table 3-1 (which summarizes changes in expenditures adjusted for inflation by the national consumer price index but not for district-to-district differences in the cost of living or the population of students with special needs) shows the growth in real resources per student—an average rate of 2.1 percent per year during the 20-year period. Revenues from state sources rose very quickly during 1972–87 and, as a consequence, the states' share of total resources increased from 38.3 to 49.3 percent. Revenues from the states then grew slowly during 1987–92. Local funding increased throughout this period, including the last five years; in 1992, local governments contributed 47.0 percent of all of public education resources. The federal government played a small and shrinking role throughout 1972–92. The second panel in Table 3-1 gives several measures of inequality in district spending at the national level.11 All of the inequality measures in Table 3-1 follow a similar pattern. Spending at the 95th percentile was 2.72 times higher 11    Each of the measures in Table 3-1 rises when inequality rises. The ratio of the 95th percentile in per-pupil spending to the 5th percentile in spending is a simple ranking that treats transfers to the top or bottom of the distribution the same; changes in spending in the rest of the distribution change the 95th to 5th ratio. The coefficient of variation is the standard deviation divided by the mean. This measure focuses on the extent of variation around average spending—both above and below the mean. The Gini coefficient measures the degree to which each cumulative percentage of pupils (e.g., 40 percent) receives an equal percentage of expenditures (e.g., 40 percent). Changes throughout the distribution of spending contribute to the values of the coefficient of variation and the Gini coefficient. The Theil index is similar to the Gini coefficient; however, it gives more weight to changes in the tails of the distribution. The Theil index is attractive in part because it is relatively easy to decompose it into disparity in spending between and within states. For more detailed descriptions of these and other measures, see Berne and Stiefel (1984).

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Making Money Matter: Financing America's Schools TABLE 3-1 Summary of Current Education Expenditures, 1972–92   1972 1977 1982 1987 1992 Funding per student ($1992)           Local 1,923 1,881 1,799 2,163 2,621 State 1,394 1,708 1,903 2,451 2,587 Federal 325 346 297 315 368 Total 3,642 3,935 3,999 4,929 5,576 Measures of inequality           95/5 ratio 2.72 2.37 2.22 2.53 2.40 Coefficient of variation 30.8 28.1 25.6 29.6 29.9 Gini coefficient (x100) 16.3 15.0 13.8 15.8 15.5 Theil Index (x1000) 43.7 37.1 31.0 40.7 40.5 Theil index decomposition           Within states 13.7 14.4 14.0 12.6 13.4 Between states 30.0 22.8 17.0 28.2 27.1 National 43.7 37.2 31.0 40.7 40.5 Variance decomposition           Within states 32.2 41.5 47.5 32.8 35.3 Between states 67.8 58.5 52.5 67.2 64.7 National 100.0 100.0 100.0 100.0 100.0 NOTES: Funding per student from the U.S. Department of Education, 1994 Digest of Education Statistics. Education expenditure inequality measures are authors' calculations from the Bureau of the Census, Census of Government School System Finance File (F-33), various years. Calculations exclude school districts from Alaska, District of Columbia, Hawaii, Montana, and Vermont. SOURCE: Evans et al., 1999. than spending at the 5th percentile in 1972. This ratio then fell to 2.40 in 1992, suggesting a narrowing of the differences in spending across students. The Theil index fell during the 1970s and early 1980s, rose sharply between 1982 and 1987, and then remained roughly constant. Inequality according to all four measures was higher in 1992 than in 1982 and somewhat lower than in 1972. The next two panels of Table 3-1 break spending inequality into two components: inequality due to differences in spending within states and inequality due to differences across states. Here the critical point emerges that between-state inequality is much larger than within-state inequality, with between-state inequality accounting for about two-thirds of the total. Table 3-1 also shows that more than 90 percent of the reduction in the Theil index during 1972–92 was due to a reduction in inequality between states; there was little change in inequality within states. This suggests that school finance reform focused at the state level is limited in its ability to equalize the education resources available to students,

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Making Money Matter: Financing America's Schools although it appears to have been important in staving off growing inequality. Evans et al. (1999) found that when they modeled what would have happened to inequality in the absence of court-mandated reform, within-state inequality would have risen sharply (instead of staying largely unchanged) between 1972 and 1992. One interesting question is what difference it would make to the findings if spending levels were adjusted not simply by an overall inflation factor but for the differences in the costs of the resources across districts and over time. Evans et al. attempted to answer this question, although data limitations (i.e., cost indices that are not available before 1987) restricted their investigation of cost adjustments to the impact of adjustments on the level and the disparity in per-pupil resources at a point in time, 1992. They used three separate indices to adjust for differences in the cost of real education resources: the Barro (1992) index, Chambers' (1995) teachers' cost index, and McMahon and Chang's (1991) cost of living index.12 Table 3-2 shows unadjusted and adjusted estimates of revenue inequality and the decomposition of revenue inequality in a manner paralleling the treatment of expenditure inequality in Table 3-1. Adjusting for cost differences between metropolitan and nonmetropolitan school districts in 1992 results in a noticeable decline in inequality as measured in various ways. The amount of inequality due to differences in revenues between states continues to dominate inequality due to revenue differences within states, although the amount of variation accounted for by between-state inequality drops from 66 percent of total inequality to 53 to 60 percent. 12    All three develop separate cost indices for urban and nonurban districts in each state; in some states, separate indices for the largest urban areas are also available. The Barro measure is an index of average teacher salaries that adjusts for teachers' education level and experience. Because a given district can influence teachers' wages by hiring only candidates with graduate degrees, this measure would overstate the adjustment necessary for purchasing power parity among districts. The teachers' cost index measure adjusts for regional variations in the cost of living and amenities. This measure removes the impact of within-state differences by adjusting for district-level characteristics that, unlike average teacher's educational attainment or tenure, are not subject to district control. Finally, the McMahon and Chang index is a geographic index that controls only for the differences in housing values, income, and population growth across districts; the McMahon and Chang index yields the smallest price adjustment. While these cost indices were developed specifically for adjusting education costs, it is not clear that they successfully capture the full difference in the costs of education across districts. Ideally, a cost index would account for the difference in wages that a central-city school district would have to offer in order to attract teachers with the same qualifications, ability, and training that wealthy suburban districts attract. We suspect that these indices do not capture those differences and that it is therefore likely that their use overstates the resources available to central-city students. Also, none of these indices incorporate differences in the variation in student needs; see Duncombe et al. (1996) for an important discussion of this issue. More is said about the cost of education issue in subsequent chapters.

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Making Money Matter: Financing America's Schools TABLE 3-2 Summary of Resources Adjusted for Cost of Living Differences, 1992     Cost of Living Adjustment Summary Measure Unadjusted Barro Cost Index Chambers TCI McMahon-Chang COL Measures of Inequality         95 to 5 ratio 2.47 2.07 2.08 2.19 Theil index 37.90 26.40 29.20 32.40 Coefficient of variation 30.10 24.40 25.70 27.10 Theil Index Decomposition         Within states 12.90 12.20 12.20 12.90 Between states 25.00 14.20 17.00 19.50 National 37.90 26.40 29.20 32.40 TCI= Teachers' cost index; COL= cost-of-living index. SOURCE: Evans et al., 1999. In many ways, then, court-ordered school finance reform, where it was implemented, achieved its primary objective of fundamentally restructuring school finance and generating a more equitable distribution of resources than would have existed in the absence of such reform. The fact that virtually all states, whether under court order or not, have significantly altered their school finance formulas, usually in ways that make them more sensitive to district needs or relative wealth, is in no small measure due to the more active interest courts have taken in school finance in the last 30 years. Nevertheless, the fact that new court cases continue to be filed, even on traditional equity grounds, and that disparities in interdistrict spending levels have far from disappeared, indicate that there are limits to how far school finance reforms are likely to go in reducing spending disparities, even when courts intervene. Limitations on the Impact of Court-Ordered Reforms The main lesson from the past 30 years is how persistent spending inequalities are in American education. There are a number of reasons why the long period of active reform has yielded only modest change. First, Feldstein (1975) showed that the remedy that Coons et al. (1970) proposed to ensure wealth neutrality—district power equalizing or a guaranteed tax base—does not in theory sever the relationship between a community's ex-

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Making Money Matter: Financing America's Schools penditures per pupil and its wealth per pupil. School districts make decisions about spending per pupil based on their local tax price, income levels of residents, and other taste and socioeconomic factors. Feldstein demonstrated that district power equalizing does not correctly offset the effects of its tax price and other wealth-related factors, and therefore districts may not respond in ways that break the positive wealth-spending relationship. Research by Evans et al. (1997, 1999) and Card and Payne (1997) provides empirical support for Feldstein's analysis. Odden's (1999) cross-sectional analysis does not speak to whether low-spending districts have lowered their tax rates in response to state aid, but it does indicate that districts may have low spending levels in part because they choose to tax themselves less than high spending districts. Odden looked at spending patterns in 1994–95 in three unidentified states that enacted different versions of school finance reform (two of which were full or partial district power equalizing programs) over the 1975–95 time period. He ranks districts in these states in deciles on the basis of revenues per pupil and shows that in all three states local property tax rates rose steadily as district wealth rose. Revenues per pupil thus rise with district wealth as well, despite the equalizing intention of state aid.13 The U.S. General Accounting Office (1998b) studied four states that changed their finance systems between 1991–92 and 1995–96 and found that, in two of the four, state changes that moved in the direction of equalization were offset because poor districts reduced their local tax rates or wealthy districts raised theirs—or both. The fact that district spending levels are still related to district wealth and tax levels reflects one of the philosophical conundrums of school finance reform. The wealth-neutrality standard adopted in Serrano and many other court decisions explicitly does not call for equal spending among districts, only that all districts are able to realize the same revenues from the same tax effort. Those who believe that unequal spending is unfair are therefore unlikely to be satisfied with the spending levels that meet the ex-ante wealth-neutrality standard. Those who value continued reliance on local control and discretion in making decisions about how much to spend on education will be more willing to tolerate continuing disparities in spending when they appear to reflect differences in local preferences for schooling versus other public goods (or tax relief). Tensions over local control are part of the political context that frequently stymie or limit finance reform efforts, even when finance changes are mandated 13    There is emerging evidence in some states that interdistrict school finance spending disparities may have decreased in the bottom half of the distribution but increased in the top half, while leaving the overall coefficient of variation about the same. In a multiple state study, Verstegen (1996) found that the McLoone index, which measures disparities within the lower half of districts ranked by spending level, has declined. The Verstegen index, a new measure of disparity for the top half, had actually increased.

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Making Money Matter: Financing America's Schools by courts. Legislators and governors who must design and implement reforms find themselves contending with public opposition on a number of fronts (Carr and Fuhrman, 1999; Reed, 1997). Rather than equalize by reducing spending down to the level of low-spending districts, thereby forcing wealthier districts to reduce spending, policy makers may try to ''level up." This effort to raise spending in low-spending districts often requires higher state taxes or redistribution of locally raised revenues from wealthier to less-wealthy districts, both of which are highly unpopular among those whose tax burdens would rise or who would see their tax dollars go to educate children in another jurisdiction. Some of this opposition is individual and personal; some stems from more general antitax and antigovernment sentiments. Demographics also play a role. Racial cleavages sometimes come into play, as voters see minorities (especially those dwelling in cities) as primary beneficiaries of reform. Poterba (1997) found that increases in the fraction of elderly residents in a jurisdiction is associated with a significant reduction in per-child spending, a result with ominous overtones in a society whose average age is rapidly increasing as the baby boom generation approaches retirement age. The political climate affecting implementation of court-ordered school finance reforms at the state level manifests itself in different ways (Carr and Fuhrman, 1999). Sometimes, as in New Jersey and Texas, it results in a decades-long dance of litigation and legislation, with legislators and governors attempting a variety of remedies before finding ones acceptable to the court. Sometimes, as in Alabama, a strong antireform governor and strong antitax and antigovernment sentiments undercut efforts to build a consensus for educational reform, and virtually no change takes place. By contrast, Kentucky was able to marshal a strong coalition in favor of reform and revamped its educational system thoroughly and comparatively quickly after the 1989 court decision declaring the existing system unconstitutional. For those whose objective for school finance reform goes beyond wealth neutrality to equality of funding for students no matter where they live, there is one final limitation to the impact of court reform that is perhaps the most significant of all. As noted earlier, two-thirds of disparities in per-pupil funding differences are attributable to between-state differences in spending rather than within state differences. The proportion is still over half even when adjustments are made for the cost of education. Federal aid to education at existing levels is limited in its ability to remedy these gaps. Federal funds help somewhat, because they are more highly targeted to poor students than are either state or local funds; in 1991–92 the majority of poor students lived in states that had significant funding gaps between poor and wealthy districts (U.S. General Accounting Office, 1998a). Because federal allocations are relatively small compared with state and local shares, however, the equalizing effect of federal funds does relatively little to reduce the overall funding differentials between low-poverty and high-poverty districts. At current

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Making Money Matter: Financing America's Schools federal spending levels, this would continue to be true no matter how highly targeted federal funds were. Jencks et al. (1972:25-6) pointed out over 25 years ago that local disparities in funding (which are wealth and poverty related) could be diminished if state or federal spending increased dramatically, even if this spending were not targeted at all but merely allocated on an equal per-pupil basis. More recently, the U.S. General Accounting Office (1998a) in its study of education funding in 1991–92 showed that targeting of state and federal funds helped but didn't completely close the funding gap between high-poverty and low-poverty districts.14 The percentage of total funding from state and federal sources was more important, however, in reducing the gap than in how narrowly these funds were targeted on poor students. "For example, both California and Virginia had about the same combined state and federal targeting rates per poor student and the same average per pupil funding levels. However, California's much larger combined state and federal share reduced its funding gap to one that was smaller than Virginia's" (U.S. General Accounting Office, 1998a:5). EQUITY AT THE DAWN OF THE NEW CENTURY As the nation enters a new century, its success in addressing questions of fairness in its school finance systems is mixed. The nation awoke in the 1950s and 1960s to the problems of unequal educational opportunities and began to address them. Around 1970 it entered a notably vigorous era of debate and reform aimed specifically at breaking the link between the property wealth of school districts and the amount of resources they had available to spend on the education of schoolchildren. Many state finance systems were overhauled. Wealth neutrality almost certainly improved, although there is no good longitudinal measure to document this statement on a national basis. State and federal categorical programs directed resources to students with special education needs and to some extent compensated for funding inequities at the local level. Overall, however, since the early 1970s, disparities in spending among districts do not appear to have changed much, although judicial intervention has ensured that they are smaller than they might otherwise have been. There are still large differences in the educational dollars spent on students depending on where they happen to live, particularly for students whose families are at the top and bottom in terms of income. Reducing spending disparities has proven difficult and contentious. The constitutional support for reform is quite variable across the states. Many people continue to believe that basic fairness requires that educational 14    In this study the poverty level of a school district was calculated on the basis of the district's number of poor students, as determined by the percentage of children living in households below the poverty level in 1989.

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Making Money Matter: Financing America's Schools resources not be determined by where a student happens to live or that all students ought to receive the same amount of educational resources (with perhaps some adjustments for differing educational costs). Cases will continue to be litigated on these grounds, and legislation will continue to be offered in hopes of achieving these objectives. Increasingly, though, it seems that finance reforms of the past, with their emphasis on the fiscal capacity of school districts, insufficiently address pressing equity questions of today, which include how to use the finance system to foster higher levels of learning for all students, regardless of background, and what so do about the desperate social, economic, and educational problems that plague some central-city schools. A fundamental dissatisfaction with discussions about finance equity as they have been carried on over the past three decades has become apparent as the nation has become increasingly concerned about educational achievement levels. While equity as a concept can be applied to any stage in the education "production" process (inputs, processes, outputs, or outcomes), in practice finance reforms aimed at achieving wealth neutrality or equalizing spending have had a very strong input focus. Moreover, they have also been preoccupied with the distribution of inputs. This approach has seemed increasingly out of sync with educational reforms that are more and more concerned with the outputs and outcomes of the educational system and with setting and realizing absolute (rather than relative) standards of student achievement. The interdistrict equity preoccupation of much school finance discussion in the last third of the 20th century is, moreover, less and less compatible with educational reform efforts that increasingly focus on the school (rather than the district) as the basic unit in the educational production process. It also has ignored considerations of intradistrict spending disparities, which in large urban school districts may be more problematic than interdistrict disparities in equalizing educational opportunities for students with the greatest educational handicaps. Even the members of the legal profession who developed the strategy of wealth neutrality, which successfully made courts a central player in school finance reform, are finding themselves desirous of a new strategy for pursuing educational equity goals through the courts. Minorini and Sugarman (1999) suggest that the foregoing considerations partially explain this. In addition, they point to the changing landscape of school desegregation, which has reinforced the desirability of finding a new school finance legal theory. Since the Brown decision declared school segregation to be illegal in 1954, advocates for minority youth, frequently those in cities, have sought and received redress in federal courts for educational shortcomings that could be traced to de jure discrimination in the past. Courts ordered remedies that included busing and voluntary integration plans, but more and more involved improvements in the educational enter-

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Making Money Matter: Financing America's Schools prise itself: in teacher quality, curriculum, facilities, and so forth. In the 1990s, however, it appeared that the litigation era reaching back to Brown was drawing to a close and that federal desegregation cases might soon no longer serve as a primary tool for trying to improve educational opportunities for inner-city poor and minority youth. Advocates began to think that school finance litigation might be a promising substitute (Tatel, 1992). For needy children attending high-cost, urban schools, however, school finance litigation would be far more attractive if the definition of equity on which it was based was broader than the conventional approach of wealth discrimination. The new approach to equity that seeks to address many of these new equity concerns concentrates attention on the adequacy of education rather than on the distribution of education resources. The next chapter continues our investigation into educational equity by exploring the promises and pitfalls of expanding equity to encompass adequacy.