Improving State School Finance Systems

1. Improving State School Finance Systems School Finance: A Policy Perspective, 4e Chapter 11

2. Improving State School Finance Systems • A Framework for Analysis • Four School Finance Systems, their Problems, and the Solutions: • Wisconsin • Illinois • Kentucky • Vermont

3. Framework for Analysis • What is the Goal? • Educational Spending • Increase educational spending (adequacy) • Equalize educational spending • Reduce educational spending • Redistribute funds among districts

4. Framework for Analysis • What is the Goal? • Educational Revenues • Lower property taxes • Change the relationship between state and local funding • Shift to more progressive (regressive) taxes • Increase revenue • Decrease revenue • Revenue neutral

5. Framework for Analysis • What is the Political Environment? • Support for increased (decreased) educational spending • Desire to limit taxes • Property taxes (or targeted property tax relief) • State taxes (sales, and income) • Redistribution of tax effort • Districts represented by powerful Legislators • Recent or pending court ruling

6. Framework for Analysis • Interaction Effects • What happens when you seek to maximize one goal? • How to other factors change? • Are those changes sound in terms of: • School finance theory • Political realities • How complicated is it to find a solution that “makes everyone happy?”

7. A Framework for Analysis • Students are the group of concern • The unit of analysis will be the district • Each district’s value will be statistically weighted by the number of students in the district • Only K-12 districts (excluding districts in the state which are elementary- or high school-only) in IL/WI • Many “districts” in VT are individual schools

8. Framework for Analysis • The analysis will use an ex post versus an ex ante analysis (i.e., will assess results using fiscal data on actual behavior) • The object of analysis will be state plus local revenues per pupil • The analysis ignores issues of vertical equity

9. Framework for Analysis • Each analysis will assess: • Horizontal Equity • Fiscal Neutrality • Adequacy

10. Framework for Analysis • In an effort to set “policy targets” for improving state school finance structures, we will assess the impact of two general strategies for improving equity and adequacy: • Simulate a GTB at or above the 90th percentile • A level that provides ex ante fiscal neutrality • Simulate a foundation at the median • A rough approximation of adequacy

11. Four State School Finance Systems • Wisconsin (data for the 1995-96 year) • Illinois (data for the 1994-95 year) • Kentucky • Vermont (data for the 1996-97 year)

12. School Finance in WISCONSIN • Tier One • GTB of $2M per pupil up to the first $1,000 of spending (this was the case for all districts, thus providing aid to all 379 districts)

13. School Finance in WISCONSIN • Tier Two • Provided the bulk of state aid • GTB = $406,592 which covered districts that enrolled 95 percent of all students • Provided for spending from $1,000 to $5,786 (the expenditure per pupil of the 56th percentile student)

14. School Finance in WISCONSIN • Tier Three • Straightforward elements: • The GTB set at statewide average • Districts with a property wealth below that level could use tier three for spending above the tier-two ceiling of $5,786 • Unique element: • For districts with a property wealth per pupil above the state average, or the tier-three GTB, there was a “negative-aid” calculation

15. WISCONSIN School Finance Problem • Shows a wide variation in property wealth per pupil: the average was $218,605, but it was only $165,734 in the lowest decile and $331,347 in the wealthiest decile • Without substantial state equalization aid, districts would have great difficulty raising equivalent amounts of money per child at the same tax rate

16. WISCONSIN School Finance Problem • Tax rates also varied but within a small range, with an average tax rate of 12.56 mills in decile one to 17.73 mills in decile 10 • Revenues per pupil varied, but by a much smaller percentage than property wealth per pupil

17. WISCONSIN School Finance Problem • Reveals the “new” school finance problem • It appears that it is the link between tax rates and property wealth that drives the spending-property wealth connection • Recall that for a GTB, the higher the tax rate, the higher the spending-per-pupil level • Most WI districts apply their tax rate to the GTB for spending at least up to $5,786; since the GTB is higher than the average for even the 10th decile, tax rates are more a determinant of spending levels than are property values

18. WISCONSIN School Finance Problem • Indeed, the equity statistics show a fairly equitable distribution of education revenues. • CV = 0.093 • McLoone Index = 0.961

19. WISCONSIN School Finance Problem • The finding that horizontal equity met the tough standards for an equitable distribution is important for two reasons: • First, the Wisconsin constitution requires a school finance system that is as uniform as “practical,” which these statistics show has been accomplished • Second, though Wisconsin used a GTB-type school finance structure, which defers spending levels to local districts and thus was not focused on providing equality of spending per pupil, the structure nevertheless provided a high degree of spending-per-pupil equality

20. WISCONSIN School Finance Problem • Fiscal Neutrality • Correlation = 0.454 • Elasticity = 0.090 • OPAI = 0.947, with the adequacy expenditure level at $6,030, a number taken from Reschovsky research

21. Improving the WISCONSIN School Finance System • Argument that districts with wealth above that of the second-tier should not receive any support • Proposal to eliminate tier one • Proposal to determine whether a high-level GTB program, which provides ex ante neutrality, can reduce the link between spending and property wealth per pupil

22. Improving the WISCONSIN School Finance System • In the summer of 2000, the WI Sup. Ct.ruled that WI’s school finance system was “as uniform as practicable,” and found the system constitutional on equity grounds • Court suggested that an adequacy case could be brought and even identified an adequacy standard

23. Improving the WISCONSIN School Finance System • Adequacy Standard identified by the WI Sup. Ct. • funding would need to be adequate for all students to achieve to proficiency standards in core subjects tested and to receive instruction in the arts, music, vocational training, physical education, social sciences, health and foreign languages, in accordance with their age and aptitude • An adequacy case has not yet been brought, but two proposals for what would constitute adequate funding have been made (Norman, 2002; Odden et al., 2007)

24. Improving the WISCONSIN School Finance System • GTB Simulation Runs with a one-tier of: • $350,000, $400,000, & $500,000 • Horizontal and fiscal neutrality equity stats worsened under each of these • However, the simulation portrays a “rosier” picture because all state aid losses are made up with greater local taxes to insure that spending does not decline if aid is lost • The lower of the GTB levels produced many state-aid losers, diminishing the political viability • Results because of the “new” school finance problem

25. Improving the WISCONSIN School Finance System • Since tax rates rise with property wealth per pupil, a higher GTB simply widens the spending-per-pupil difference between lower-wealth and higher-wealth districts • This result increases the CV, reduces the McLoone, and increases elasticity • A GTB program, even a combination foundation-GTB program, with the GTB set at a high level, simply worsens fiscal equity statistics in a state like Wisconsin with the “new” school finance problem

26. Improving the WISCONSIN School Finance System • Compare: Simulation of a foundation program at $6,000 per pupil with a RTR of 14 mills • (chosen because it had been suggested by many education and political leaders as an expenditure level and a school finance structure that might be more suitable for the state)

27. Improving the WISCONSIN School Finance System • Improves equity and adequacy • CV drops from 0.093 to 0.054 • McLoone Index increases to a perfect 1.0 • “perfect” equity in bottom half • Elasticity drops to 0.065 • Adequacy Index improves to 0.997

28. Improving the WISCONSIN School Finance System • The cost is modest, about a 13 percent increase in state funds but a decline of about 1.6 percent in local funds • This foundation program could be simulated with a lower RTR; the equity statistics would remain about the same, and the total increased cost would be about the same, but the local portion of the increase would drop and the state portion would rise • At the 14 mill rate, the program increased aid to 322 districts, and not surprisingly, reduced aid to 32 districts, largely those districts that had received some aid from the first tier

29. WISCONSIN Conclusion • The “new” school finance problem can be enhanced with high-level foundation programs • The simulations showed that GTB programs worsened equity measures • In a state such as Wisconsin, which already spends far above the national average, the simulations show that adequacy can be approached with only modest increases in spending, however split between local districts and the state

30. School Finance in ILLINOIS • Data excludes the Chicago school district • IL had a two-pronged SF structure: • Most districts operated under a foundation-type formula • Foundation = $2,900 • RTR = 19 mills • The state also used a weighted-pupil count to determine and allocate state aid • Weights for education level

31. ILLINOIS School Finance Problem • For years, Illinois struggled with proposals to enhance the state role in public school financing • The state role in 1994-95 was just 53.5 percent • For the decade prior to 1994-95, the state experienced school finance legal challenges, votes on constitutional changes to increase the state role, and proposals for school reform from both the governor and various members of the legislature

32. ILLINOISSchool Finance Problems • There was a wide variation in property wealth per pupil: the average was $57,107, but it was close to $30,000 in the lowest deciles and $182,744 in the wealthiest decile • The wealthiest decile had just over six times the property wealth per pupil, and thus six times the ability to raise local revenues for public schools, than the poorest decile has • Without substantial state equalization aid, districts would have great difficulty raising equivalent amounts of money per child at the same tax rate

33. ILLINOISSchool Finance Problems • Tax rates also varied but within a smaller range, with an average tax rate of 33.45 • Revenues per pupil varied, but by a much smaller percentage than property wealth per pupil • Illinois is a state with the “new” school finance problem • Large differences between “downstate” and “upstate”

34. ILLINOISSchool Finance Problems • The data also show that there are anomalies in the connections among property wealth, tax rates, and spending in Illinois • Although there was a general, positive connection between wealth, tax rates, and spending, the bottom- and top-spending deciles represented differences from the general overall pattern

35. ILLINOISSchool Finance Problems • The larger role of local wealth in driving spending disparities in Illinois is reflected in the equity and adequacy statistics, all of which are “worse” than those in Wisconsin • CV = 0.229 • McLoone Index = 0.931 • Elasticity = 0.190 • Correlation = 0.821

36. ILLINOISSchool Finance Problems • Finally, the low level of spending is reflected in the OPAI, which is just 72.6 percent. • The adequate spending level was set at $4,500 • This was a level somewhat higher than that identified by an Illinois study of the level of state and local revenues per pupil needed to have 70 percent or more of students achieve at or above state standards on the Illinois state tests

37. Improving the ILLINOISSchool Finance Structure • The following are assessments of two strategies attempting to: • reduce expenditure per pupil disparities • decrease the link between spending and wealth, or • provide more adequate levels of revenues

38. Improving the ILLINOISSchool Finance Structure • We simulated a GTB program at $100,000 • This figure is at the lower-end approximation of the 90th percentile and close to the zero-aid district in the extant foundation program • Even this relatively high-level GTB required most districts to increase tax rates to maintain former spending levels • The problem with a GTB program for a state with the “new” school finance problem is that a very high, and thus very expensive, GTB must be used, and then only modest gains on some equity and adequacy fronts are produced

39. Improving the ILLINOISSchool Finance Structure • Next, we tried a foundation program to ensure that the lower-spending districts actually had to raise spending, which allowed spending above the foundation level but only with local wealth. • The foundation expenditure was $4,300 and a RTR was 35 mills (one mill above the median)

40. Improving the ILLINOISSchool Finance Structure • Accomplished the goal of raising the state percentage and lowering the local percentage role in financing schools • It also resulted in larger gains on all equity and adequacy fronts • CV = 0.110 • McLoone Index = 0.997 • Elasticity = 0.098 • Adequacy Index = 0.964 • However, the program required an extra $891 million in state revenues and $66 million more in local revenues, the latter produced by setting the required minimum local tax effort at 35 mills

41. Improving the ILLINOISSchool Finance Structure • The dilemma in “fixing” the Illinois school finance system was that lower foundation levels produced less progress on equity and adequacy • Higher foundation levels could not be accompanied by a required local tax effort that exceeded 35 mills, which is still quite high, and thus required large infusions of state dollars

42. Improving the ILLINOISSchool Finance Structure • The bottom line was that the only way significant equity and adequacy gains could be made was by raising the foundation level • But the “cost” of doing so was a substantially enhanced state fiscal role • close to an increase of $1 billion, which represented an 80 percent increase from the base of $1.2 billion

43. ILLINOISConclusion • High state cost had slowed school finance reform for years • The only option was a much larger state role; that either required a state tax hike, which was not politically feasible, or a very healthy economy that increased state revenues that could be devoted to school finance • The latter was the scenario that finally prevailed. The fact that such a program also raised state aid in nearly all districts added to the political acceptability of the program

44. KENTUCKYHistory of School Finance • In response to the ruling in Rose v. Council for Better Education in 1989, the Kentucky legislature dramatically changed the SF system • Specifically, the court in Rose found that the SF structure violated the state constitution’s education clause which called for the legislature “to provide an efficient system of common schools throughout the Commonwealth”

45. KENTUCKYHistory of School Finance In assessing the constitutionality of the KY SF system, the Circuit Court had found: • Marked variation in property wealth of school districts • The allocation of state aid did not compensate for the variation in wealth • Wide disparity in per-pupil revenue of school districts • Education quality was contingent on available revenue • The Circuit Court concluded that an efficient school finance system required substantial uniformity and substantial equality of financial resources

46. KENTUCKYHistory of School Finance • In response to the ruling the KY legislature created a new SF system, called Support Education Excellence in Kentucky, or SEEK

47. Equity in 1999-2000 • Two pupil categories • ADA • WADA • Two price categories • Current dollars • Adjustment for cost differences across districts

48. Specific Analyses • Six Revenue measures • With Transportation • SEEK (Base + Tier I + Tier II) • SEEK plus state and local out of formula funds • SEEK plus out of formula plus Federal funds • Without Transportation • SEEK (Base + Tier I + Tier II) • SEEK plus state and local out of formula funds • SEEK plus out of formula plus Federal funds

49. Coefficient of Variation 1999-2000

50. Ten Year Equity Analysis • SEEK (base + Tier I + Tier II) + state and local out of formula minus transportation • Equity measures • Coefficient of Variation • McLoone Index • Correlation • Elasticity • Verstegen Index