Lecture 2: Designing School Aid Systems

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Lecture 2Designing School Aid Systems

• EDA 757/PPA 730
• Fall 2002

Based partly on presentation developed by
Professor Bruce Baker, University of Kansas.
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Lecture 2 Outline

• Basics of intergovernmental grants
• Objectives
• Types
• Connecting objectives and types
• School finance litigation
• History
• Types of litigation
• Designing general purpose aid
• Defining equity standard
• Types of aid
• Measuring equity

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Objectives of Intergovernmental Grants

• Horizontal equity Help equalize the fiscal
  burden of financing a public service across local
  governments.
• Efficiency Encourage local government to provide
  more (or less) of a particular service (e.g.,
  special education)
• Taxpayer equity Reduce burden on low income
  local taxpayers by shifting financing to more
  equitable state and federal taxes.

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Conditions of Use of Aid

• General operating aid Very little restrictions
  on the use of the aid. Possibly require effort
  of maintenance.
• Block grant When a number of categorical grants
  are bundled into one overall grant that can be
  used for broad purpose (e.g. special education).
• Categorical grant When grant is targeted to
  specific service or object (e.g., textbooks,
  computers, transportation).

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Grant Type

• Lump-sum grant A flat amount is provided local
  government. Does not vary with amount spent by
  local government.
• Open-ended matching grant Amount that local
  government receives is dependent on what they
  spend. State agrees to match local spending at
  a certain percent.
• Closed-ended matching grant Matching grant,
  where there is a limit to how much the
  higher-level government is willing to match local
  spending.

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Grant Distribution

• Formula grant The grant is distributed based on
  a set formula. The local government does not
  have to apply.
• Project grant The local government has to apply
  for the grant through a formal application
  process (often used for capital project grants).
• Political distribution Distribution is set by
  state politicians as part of setting state
  budget. Grant is usually only for one year. (In
  NY known as member items)

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Matching Grant Types and Objectives

• Correcting horizontal equity problems
• General purpose grant
• Lump-sum aid design
• Distributed by formula
• Encourage more provision of service
• Categorical grant
• Open-ended matching grant
• Distributed by formula (with or without project
  application process).
• Improve taxpayer equity
• General purpose grant or property tax relief
• Targeted to lower-income households.

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History of State Education Aid

• State financing of local schools almost
  nonexistent before 1900.
• Early grants in most states were flat grants per
  pupil.
• Foundation formula (formula-based lump-sum
  grant) developed in 1920sstill remains principal
  type of grant.
• Formula-based matching grants implemented in
  1970s as a result of court litigation
  (guaranteed tax base or GTB)
• Some states have combined foundation and GTB type
  grants.

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School Finance Litigation History

• Early cases (McInnis v. Shapiro, 1968, and
  Burness v. Wilkerson, 1969)state aid systems
  upheld.
• Wave I (Serrano v. Priest, 1971, and San Antonio
  v. Rodriquez, 1973)
• Equal protection cases
• Rodriquez removed federal courts from school
  finance litigation.

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School Finance Litigation History

• Wave II (1973 to 1989)
• Cases in state courts
• Mix of equal protection clause and education
  clause cases.
• Focus mainly on equity with limited success.
• Wave III (1989 to present)
• Most visible cases are based mainly on education
  clause.
• Adequacy standard has become major equity
  standard.
• New Yorks CFE case falls into this category.

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Equal Protection Clause

• New York No person shall be denied the equal
  protection of the laws of this state because of
  race, color, creed, or religion (N.Y. Const.
  Art. I, 11)
• Strict scrutiny test If policy affects
  fundamental right, then must serve a compelling
  governmental interest. (System usually
  overturned)
• Rational basis test If policy not affecting
  fundamental right, then state has to prove that
  it is rationally related to legitimate government
  purpose. (System usually upheld)

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Education Clause

• New York The legislature shall provide for the
  maintenance and support of a system of free
  common schools, wherein all the children of the
  state may be educated. (N.Y. Const. Art. XI,
  1)
• Other common clauses efficient, thorough and
  efficient
• First have to define the standard associated with
  the education clause. (May use legal precedence,
  intentions of constitutional founders.)
• Second have to demonstrate the present school
  finance system violates this standard.

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Steps in Developing Basic Operating Aid System

• 1) Define the equity standard
• 2) Develop key measures
• 3) Design aid formula
• 4) Estimate equity impacts of grant.

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Defining Equity Standard
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Develop Key Measures

• Fiscal capacity Revenue that can be raised with
  a reasonable tax burden on residents? Choices
• Property values per pupil
• Income per pupil
• Fiscal need (costs) Spending required to provide
  similar services (or opportunity to achieve
  similar student performance). Measured by
• Cost index cost of resources, student needs
• Weighted pupils poverty, LEP, special needs.

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Developing a Cost Index

• Determine relationship (using statistics) between
  spending per pupil and factors that district
• Can control student performance, efficiency
• Cant control private salaries, enrollment size,
  student characteristics.
• Estimated spending per pupil in each school
  district holding factors district can control at
  state average.
• Divide predicted spending by average spending in
  state (times 100) to get cost index.
• Index of 150 indicates that it will cost 50
  more in this district to reach standard than
  average district.

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Option 1 Flat GrantComparison of Per Pupil
Revenue for 2 Districts
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Option 2 Foundation Program

• No adjustment for costs (minimum spending per
  pupilF)
• Aid (per pupil) F r V
• F state-set foundation spending per pupil
• r state-set minimum local tax rate
• V local property values per pupil
• Adjustment for costs (minimum level of resources
  or student performance)
• Aid C F r V
• C cost index/100.

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Option 3 Guaranteed Tax Base Formula (Matching
Grant)

• With no cost adjustment
• Aid r (GTB - V)
• r property tax rate (set by district)
• GTB tax base guaranteed by the state
• V local property values per pupil
• With cost adjustment
• Aid r ((C x GTB) - V)
• C cost index/100.

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Equity MeasuresRelative Equity

• Federal Range Ratio Difference in spending
  between districts at 95th and 5th percentile as
  percent of spending at 5th percentile.
• FRR (E95 - E5) / E5
• Coefficient of Variation average variation as
  percent of average spending.
• CV Standard deviation/mean
• Gini coefficient most comprehensive equity
  measure.

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The Gini Coefficient
Gini Coefficient X / (X Y) Range 0 to 1 0
is perfect equity.
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Equity Measure for Fiscal Neutrality

• Correlation of per pupil spending and property
  wealth (or income).
• Correlations range from 1 to 1
• Measure linear association between variables, and
  whether relationship is positive or negative.
• Closer correlation is to zero, the more fiscally
  neutral.

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Equity Measures for Adequacy

• For districts below the standard, subtract
  spending at the standard (E) from district
  spending (E).
• E - E distance.
• Multiply these distances by the number of pupils
  in each district, and then sum all of these
  pupil weighted distances.
• Multiply E by the number of students in all
  districts (above and below standard).
• Divide (2) by (3) to get the average percent of
  students below the standard.
• McLoone Index is calculated the same way, but
  assumes standard is the same as median.

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Summary of Formulas

• Flat Grant
• Strengths Allows funds to be distributed to all
  districts (often considered political pay-off to
  wealthy districts)
• Weaknesses Provides minimal equity unless used
  to entirely replace local funding.
• Foundation
• StrengthsProvides direct support to schools to
  meet adequacy standards.
• WeaknessesBy targetting funds, diminishes local
  control over spending (only local )

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Summary of Formulas

• Flat Grant
• Strengths Simple, politically popular because
  allows funds to be distributed to all districts.
• Weaknesses Does little to improve equity unless
  used to entirely replace local funding.
• Foundation
• Strengths Focused on funding districts to reach
  adequacy standardmost effective way to fund
  adequacy standard.
• WeaknessesBy forcing minimum local tax effort
  diminishes local control over spending. Doesnt
  prevent wealthy districts from supplementing
  foundation with more local taxes.

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Summary of Formulas

• Guaranteed Tax Base
• StrengthsAllows communities greater local
  control over spending decisionsmay be most
  effective formula for fiscal neutrality standard.
• WeaknessesState cannot guarantee or control
  spending equity, only tax base equity.
• Combination GTB and Foundation
• StrengthsCan be used to create to both bring up
  the bottom (foundation), and equalize any local
  supplementation beyond foundation.
• Weaknesses More difficult to design and
  implement.