Economics 147

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Economics 147

• Winter 2005
• Lecture 11

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Outline for today

• Centralized vs. decentralized school finance
• Pros and cons
• Historical evolution in the US
• Types of centralized school finance
• Categorical aid
• Formula aid
• Foundation
• Power equalization

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School finance in the US

• Depends on property taxes
• Reliance on state funding rising, reliance on
  local funding falling
• Per-pupil spending has been growing faster than
  per-capita income

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Who spends most per pupil (US outside of CA)?

• HIGHEST SPENDING
• Rural schools
• High-income suburbs in metropolitan areas
• Central cities
• Lower/middle class suburbs
• Small towns
• LOWEST SPENDING

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Centralized vs. local finance
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Centralized school finance

• Two components
• Categorical aid (conditional block grants)
• Lump-sum subsidy ? income effect only
• Formula aid (school finance equalization)

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Block grants
Exp on pvt goods
Y total income in the town
YBG
Y
Exp on educ
E1
E2
Y
YBG
Entire change in E is pure income effect
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Conditional block grants
Exp on pvt goods
Y total income in the town
YBG
In this case, conditional block grant has same
effect as unconditional.
Y
Exp on educ
E1
E2
Y
YBG
Entire change in E is pure income effect
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Conditional block grants
Exp on pvt goods
YBG
Y total income in the town
In this case, conditional block grant constrains
towns choice more than unconditional grant
would.
Y
Exp on educ
E1
Y
YBG
Desired E2
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Categorical aid

• Must be awarded to districts based on their
  populations by category
• Ex disabled, language minority, poor
• Not funded with property taxes
• Generally from state income or sales tax revenue

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Categorical aid can be federal as well as state

• Federal aid is about 7 percent of total US K-12
  education revenue
• Most of that 7 percent comes from 4 programs
• Title I
• Disabled and learning disabled
• Language minority
• Free and reduced price school lunch

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Historical context

• Before early 1970s most state aid was
  categorical
• Then shift to school finance equalization
• Changes prices
• Income and substitution effects
• Two main types of SFE formulas
• Foundation aid
• Power equalization aid (guaranteed tax base)

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Foundation aid

• Guarantees minimum spending per pupil (F)
• Taxes districts on property values per pupil to
  do so
• ti property tax rate in district i
• vi property value per pupil in district i
• tF foundation tax rate set by state
• vs mean property value per pupil in state

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Foundation aid

• How to set F?
• How to set tF?
• Consider states budget constraint
• Tax revenue collected PP Foundation aid paid
  out PP
• tF vs F
• Per pupil revenuei ti vi (F - tF vi)

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When do districts get a positive subsidy?

• Per pupil revenuei ti vi (F - tF vi)
• State aid PP to district F - tF vi
• If tF vi lt F, district i gets a positive
  subsidy
• Recall state BC tF vs F
• So if tF vi lt tF vs , district gets pos.
  subsidy
• vi lt vs ? positive subsidy for district i
• Same approach to see who pays in

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Power equalization (PE) aid

• Foundation aid guarantees a floor, not
  equalization
• Extreme form of PE can actually equalize
• See CA
• State sets tax rate tG
• District i sets tax rate ti gt tG
• State guarantees tax base vs on first tG mills
  of ti
• mill 1/1000th

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Power equalization (PE) aid cont.

• State guarantees tax base vs on first tG mills
  of ti
• Districts own tax base is used for remaining
• ti - tG mills
• Per pupil revenuei tGvs (ti -tG)vif(vs-vi)
• f gt 0
• f(0) 1