Chapter 9 The Structure of School Finance Systems

1
Chapter 9 The Structure of School Finance
Systems
2
Education Is a State Responsibility

• States have the responsibility to plan for and
  deliver a system
• of free, public education
• States also have the duty
• to equalize funding based on the localities
  fiscal capacity to pay for educational programs

3
School Finance Relationships

• Political
• Financial
• Control
• Direction

• Whoever funds schools controls its direction
  and practices.

4
Localities Operate Schools

• Although education is a state function, virtually
  every state, except Hawaii, has delegated the
  school systems operation to the localities
• The states, for the most part, maintain an
  oversight and compliance role in the local school
  systems operation

5
Consolidation for Efficiency

• Once local oversight was relegated to
  neighborhood schools and school boards
• The trend over the last 60-70 years has been to
  decrease the number of school districts in the
  United States
• This consolidation has made for greater
  efficiency. It has, however, depersonalized to
  some extent schools operation administration

6
Consolidation for Efficiency, cont.

• Gradually over the 20th century, the states
  assumed more responsibility to oversee education
• In 1937-38, the first year keeping such
  statistics, the U.S. had 119,001 school districts
• In 2000-01, the total number of school districts
  totaled 14,859

7
Consolidation for Efficiency, cont.

• More school districts brought together more
  communities representing a wider geography
  supporting the school
• While school consolidation may have provided
  greater efficiency, it also negatively impacted
  citizens perceptions of their public school
  ownership
• In fact, this ownership issue has resulted in
  some calling for replacing school boards with
  local school councils

8
Consolidation for Efficiency, cont.

• While this trend decreases resource duplication
  and waste, it likewise decreases community
  feelings of pride and investment in their local
  schools

9
Number of Students per School District, 1939-40
and 1999-2000
10
Revenues and Expenditures

• The federal share of public school revenue has
  increased each decade from less than 1 in 1919
  to a high of 9.8 in 1979

11
 
1959-60
39.1
56.5
1969-70
8.0
52.1
39.9
1979-80 9.8 46.8
43.4
1989-90 6.1 47.1
46.8
12
of Revenue by Source
13
Federal Revenue Sources

• The New England states have the lowest percentage
  of federal revenue source at 5.3

14
Federal Revenue Sources, cont.

• The Southeast states, on the other hand, have the
  highest revenue percentage from federal sources
  at 9.1

15
State Revenue Sources

• The Mid East states have the lowest percentage at
  39.9 while the Far West has the highest
  percentage of state revenue at 61

16
Local Revenue Sources

• The Far West has the lowest percentage at 30.6

• Mid East region has the highest percentage of
  local revenue sources at 55.5

17
Local Funding

• Local funding is at the heart of schools
• The range in local revenue percentages ranges
  from a low of 12.6 in New Mexico to a high of
  64.9 in Nevada

12.6 Local revenues
64.9 Local revenues
18
Federal Responsibilities

• 1867 - Congress established the United States
  Department of Education
• Later downgraded to an Office of Education
• Became part of the Department of Housing,
  Education, and Welfare.
• 1980 Reestablished as the Department of
  Education

19
Federal Responsibilities, cont.

• The federal education functioned primarily
  providing grants guidance for states and school
  systems under various programs
• Title V of the Elementary and Secondary Education
  Act of 1965 strengthened the State Departments of
  Education by providing funding for increased
  state education personnel as well as for
  training, equipment, research and development

20
State Responsibilities

• The State Education Agencies (SEAs) are generally
  empowered by the state legislature to coordinate
  and oversee the local education agencies (LEAs)
• State Boards of Education date back to 1784
• The first State Superintendent was appointed in
  New York in 1812

21
State Responsibilities, cont.

• State superintendents have the responsibility for
  providing leadership to the State Department of
  Education and carrying out the duties with which
  the agency has been charged
• In that process, state superintendents have been
  in the position to become eloquent spokespersons
  for education with the general public and with
  the legislators, as was the case with Horace Mann
  
•  

22
State Responsibilities Politics

• The Governor influences education through their
  campaign platforms, whom they appoint in
  leadership positions once elected, and their
  positions sheer bully pulpit

• The Department of Education is generally
  responsible for carrying out the states
  education legislation

23
Federal, State, Local Interaction

• The federal No Child Left Behind legislation of
  2001 focuses on states accountability to meet
  academic standards

• What takes place at the federal, state, and local
  levels varies depending upon how the grant
  legislation is written

24
Federal, State, Local Funding

• The Federal Department of Education announces the
  latest authorization of the ABC Act once Congress
  approves the legislation
• DOE makes legislative details available to the
  public
• State Education Agencies (SEAs) are authorized to
  submit applications for funding

25
Federal, State, Local Interaction

• The SEAs make the application process available
  to the Local Education Agencies (LEAs)
• The SEA usually provides technical assistance to
  the school districts in completing the grant
  application package
• The grant will usually have a list of assurances
  with which the local school district must comply
  to obtain the funds

26
Federal, State, Local Funding

• The SEA collects LEA grant applications assures
  the Federal Department of Education that they
  have met grant provisions
• The Federal Department of Education reviews
  applications and awards grants to the states
• The SEA, in turn, is allowed to take a
  percentage of the grant for administration and
  divides remaining funds to the localities
• Occasionally, the states audits local funds and
  the federal office audits state funds.

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Advantages of Layered School Financing

1. Equalization due to fiscal capacity of the states
   and the localities
2. Equitable adequate distribution of educational
   services
3. Efficient provision of educational services
4. More decentralized decision-making authority to
   meet the states and localities needs

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1st Advantage of Layered School Financing

• Some school districts lack the local capacity to
  raise revenue and require a larger level of
  government to spread the fiscal effort over a
  larger base
• The poor locality can draw on outside resources
  
• The resources available at the smallest level of
  government, therefore, do not determine the
  quality of education

29
2nd Advantage of Layered School Financing

• States can determine what level of adequate
  services will be mandated and at what levels this
  will occur
• With the increased layers of government and
  funding that come from a broader tax base, states
  can devise different approaches to meeting needs
  within the state

30
3rd Advantage of Layered School Financing

• In the multiple layered approach to providing
  services, the state or the federal government may
  use its influence to consolidate school
  operations or the services delivery within school
  districts
• By encouraging efficiency, schools reap the
  economic and instructional benefits of increasing
  the achievement impact at a lower cost

31
4th Advantage of Layered School Financing

• Allowing individuals the opportunity to select
  the services that match what they feel they need
  and want is a powerful psychological phenomenon
  that ties the all three prior advantages together
  
• Communities tend to coalesce around areas that
  offer public services matching their personal
  preferences

32
Advantages to Layered School Financing

• With fiscal layering funding, the interplay
  of the federal, state, and local services
  provides distinct advantages for individuals to
  select the type of environment in which they wish
  to live and what services are important to them.

33
Local Equalization

• Usually, the local level does little to equalize
  for funding
• Studies show that, within the same school
  district, schools in wealthier locations receive
  a greater funding share than poorer schools
• School demographic, achievement, other data
  make it necessary to fund schools based on their
  individual needs for meeting district goals

34
State Equalization

• States have a responsibility to equalize funding
  based on the localities capacity to pay for
  services
• States use a formula to determine how the
  equalized funds are determined
• These formulae vary in complexity and
  effectiveness

35
1st - States Determine the Floor Level of
Educational Services

• This is a basic, no frills level of services
  and not what most educators would consider as a
  program that meets everyones needs
• This floor level funding of services usually
  consists of computing a dollar figure for
  professional education positions for a given
  number of students, technology, special
  weightings for students, and the like
• What states consider in this floor level of
  services varies

36
2nd - State Determines the Localities Fiscal
Capacity

• States use a wide variety of factors in
  determining this wealth formula
• Every state uses a different formula
• Usually, property values, income tax, and an
  estimate of locally generated business revenue
  become a proxy for determining the localitys
  ability to fund services
• Designing a workable funding formula becomes an
  increasingly difficult process

37

• Urban locations with a large business and
  industry tax bases tend to have more, different,
  and much more expensive social, economic,
  educational problems than suburban or rural
  locations with fewer business and industry

38

• Rural areas have problems that other areas do not
  have, including isolation, difficulty attracting
  teachers, and too few students to afford many
  high quality educational offerings

39
Coming to Consensus

• Coming to a consensus on community values for
  educational results, the relative weighing of
  various factors associated with wealth, and the
  weighing the varying needs within a state can
  tax even the brightest and most eloquent
  politicians

40
3rd State Must Decide the Basis for
Distributing Funds

• Some states believe that the poorest localities
  should pay nothing towards the floor level of
  educational services
• Instead, they believe the wealthiest localities
  should pay the entire cost of providing these
  basic services
• Other states believe that every locality should
  pay something towards the cost of providing these
  basic services

41
An ExampleEqualization in Virginia

• The poorest localities have a composite index of
  .2 and the richest have a composite index of .8
• A poor locality with a .2 composite index would
  be required to raise 20 of the funding for the
  Standards of Quality through local sources with
  the state funding 80

• A mid-range locality with a composite index of .5
  would fund 50 of the Standards of Quality with
  local funds and 50 state funds
• A wealthy locality with a composite index of .8
  would fund 80 of the Standards of Quality with
  the state paying only 20

42
Current School Finance Structures

• Forward-thinking individuals who saw the need for
  equalizing school funding, had the ability to
  sell their new ideas to progressive states and
  localities
• These pioneers included Ellwood Cubberley, Robert
  Haig, Henry Morrison, Paul Mort, George Strayer,
  and Harlan Undegraff

43
The Next School Finance Leaders

• A 2nd generation of school finance scholars,
  including Roe Johns and Edgar Morphet (around
  1940), refined and extended the effort to
  establish state equalization formulae throughout
  the country

44
The Next School Finance Leaders, cont.

• The 3rd generation of school finance scholars
  (late 1970s through today) include Kern
  Alexander, Richard Salmon, Allan Odden, Lawrence
  Piccus, and others
• They keep working to implement the democratic
  ideals at the most basic level of education its
  financing

45
Current U.S. State School Finance Systems

• Flat grants
• Foundation plans
• District power equalizing
• Full state funding

46
Flat Grants

• This program distributes state aid to localities
  based on a flat amount of money on a per-pupil
  basis or on a defined personnel basis (funding x
  number of teachers for y number of students)
• It does not factor in student attendance or how
  much additional funding the locality is able to
  raise independently above and beyond the flat
  grant

47
Flat Grants Model

• Amount of state aid per pupil
• Total State Revenue
• Number of Pupils in the State

48
Example of Flat Grants
School District Local Revenue Flat Grant Flat Grant of Total Total Spending
A 1,000 1,000 50 2,000
B 4,000 1,000 20 5,000
C 7,000 1,000 12.5 8,000
D 9,000 1,000 10 10,000
E 11,500 1,000 8 12,500
49
Flat Grant Comparison

• In School District A, the state provides 50 of
  the total per pupil expenditure or a 100 match
  to what the locality can afford to pay
• In School District E, the state provides only 8
  of the localitys total expenditure
• While this model does have a large age impact on
  the poorest localities, it does very little to
  equalize revenue
• School District E spends more than six times what
  School District A spends on a per pupil basis

50
Flat Grants Advantages

• It can be used in conjunction
• with other models
• Every district receives a uniform per student
  appropriation. Wealthier localities can
  supplement
• If the state provides sufficient funding in the
  flat grant for a truly adequate level of
  education, certain advantages exist for poorer
  localities

51
Flat Grants Disadvantages

• Little provision for equalizing funding across
  the state because the grants are not based on the
  districts wealth
• Unrelated to fiscal capacity, and unrelated to
  effort
• Assumes, wrongly, that the grant is sufficient to
  cover adequate education costs expected within
  the state

52
Foundation Plans

• Most states use some type of a foundation plan
• The concept affirms that the state has a
  responsibility an interest in providing a
  minimum level of education
• The foundation program holds that the minimum
  education level can be costed-out, or financially
  apportioned in a rational manner

53
Foundation Plans, cont.

• A foundation program requires that a state
  establish a minimum local tax rate and a minimum
  education spending level for school districts in
  the state
• This minimum spending level is known as the
  foundation amount

54
Foundation Plans, cont.

• This minimum tax rate may or may not produce a
  sufficient tax yield to meet the minimum spending
  level
• The state aid makes up any shortfall in the
  required tax rate or yield and the spending level
  (the foundation amount)

• Localities can tax at higher rates than the state
  prescribes and provide even higher levels of
  education services

55
Foundation Plans Formula

• State Funding Guarantee of Pupils X
  Guarantee of Plan (constant)
• Local Share Required Local Tax Rate (constant)
  X Local Assessed Valuation
• State Aid Total Foundation Guarantee Local
  Share

56
Calculation Foundation Funding
School District Local Required Effort Per Pupil Equalized Property Value times 10 mills State Share Guaranteed Foundation minus Required Local Effort
A 100,000 x 0.010 1,000 5,000 - 1,000 4,000
B 200,000 x 0.010 2,000 5,000 - 2,000 3,000
C 250,000 x 0.010 2,500 5,000 - 2,500 2,500
D 300,000 x 0.010 3,000 5,000 - 3,000 2,000
E 400,000 x 0.010 4,000 5,000 - 4,000 1,000
57

• School District A (low capacity) has a per pupil
  property value of 100,000. If the constant
  required local effort is 10 mills, the School
  District A must come up with 1,000 of the
  foundation level of per pupil spending of 5,000.
  The state share will then be 4,000.
• School District E (high capacity) has 400,000 of
  equalized property value per student. This
  property value taxed at the required minimum of
  10 mills produces revenue of 4,000 per pupil
  they must pay to meet the foundation level. The
  states share for School District E will be
  1,000 per pupil.

58
Foundation Program Allows Local Leeway

• Localities can raise more than the foundation
  figure
• For the next example, let us assume that School
  District A cannot afford to raise additional
  revenue while School District E can afford to
  raise an additional 1,000 per student

59
Summary of Foundation Formula
School District Local Required Effort State Share Foundation Level Spending Leeway Funding Total Per Pupil Spending
A 1,000 4,000 5,000 0 5,000
B 2,000 3,000 5,000 100 5,100
C 2,500 2,500 5,000 250 5,250
D 3,000 2,000 5,000 500 5,500
E 4,000 1,000 5,000 1,000 6,000
60

• The equalization impact becomes obvious comparing
  the foundation plan with the flat grant model
• The local share for district with the least
  capacity, A, is only 20 of the foundation
  amount. The local share for the wealthiest
  district, E, is 80 of the foundation level
• Obviously, leeway funds are allowed, which in
  this example, provide School District E with 20
  greater per pupil funding than with School
  District A

61
Foundation Plan Advantages

• Equalizing impact towards a state-established
  minimum foundation level as poorer districts tend
  to receive more state funding
• Minimum levels of locally-raised revenue
  requirements (taxation and spending levels) for
  the required local effort
• Allows additional spending (local leeway)

62
Foundation Plan Disadvantages

• Foundation level may be set too low to support a
  realistic education plan
• Minimum level must be adjusted periodically to
  reflect practice cost changes
• Fails to overcome the significant variances that
  exist in local capacity to raise revenue
• Uses local fiscal capacity, not local effort as
  the variable for equalizing funding
• Minimalist not adequate or quality education
  program

63
District Power Equalizing

• District power equalizing (DPE) is virtually the
  same as
• Guaranteed tax yield (GTY)
• and
• Guaranteed tax base (GTB) programs

64
DPE Model Concepts

1. The ability to generate revenue should be
   equalized among the districts in the state. The
   locality should determine how much.

65
DPE Model Concepts, cont.

1. Local variance in fiscal capacity is neutralized.
   Education quality is a function of state not
   local wealth. An equal yield for an equal
   effort.

66
DPE Model Concepts, cont.

• 3. The state either establishes a schedule of tax
  rates that guarantee a given amount per pupil for
  the locality or the state provides a guaranteed
  tax base per pupil across the state for the
  localities.

67
District Power Equalization Formula

• State Aid
• Local Tax Rate X
• Guaranteed Yield
• (Local Assessed Valuation X Local Tax
  Rate).

68
District Power Equalization Formula Example

• Example
• (Equivalent to a 100,000 Guaranteed Tax Base) 
• Guaranteed
• Tax Rate Revenue Yield
• 5 mills 500
• 10 mills 1,000
• 15 mills 1,500
• 20 mills 2,000

69
Calculation of District Power Equalization
School District Fiscal Capacity per Pupil Mill Rate Imposed by Locality Local Amount Generated State Aid Total Per Pupil Spending
A 40,000 8 320 3,680 4,000
B 40,000 9 360 4,140 4,500
C 100,000 10 1,000 4,000 5000
D 150,000 9 1,350 3,150 4,500
E 300,000 8 2,400 1,600 4,000
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In the DPE Program

• There is no single foundation level
• The districts are free to set their own mill rate
  
• Those districts electing to establish the mill
  rate at the maximum by the state qualify for the
  maximum per pupil funding
• Those electing a lower mill rate qualify for
  reduced per pupil funding

71
Comparison of DPE Foundation Programs

• DPE Programs
• No required local effort
• Establishes minimum guarantee of revenue per
  pupil per mill of taxation for equalized property
  value
• Locality can tax for leeway funds
• Equalize for local capacity

• Foundation Programs
• Required local effort
• Establishes minimum per pupil spending levels
  based on required mill rate per equalized
  property value
• Locality can tax for leeway funds
• Equalize for local capacity

72
DPE Model Advantages

1. DPE tends to equalize for the ability to pay for
   education (not on spending, however). There is
   also a recapture provision for the state,
   sometimes called negative state aid. This
   allows the local school districts above some
   determined level of fiscal capacity to levy a
   minimum local tax and return a portion of the tax
   yield to localities with lower fiscal capacity.

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DPE Model Advantages, cont.

• 2. It allows for the locality to set its spending
  level.
• 3. It provides for taxpayer equity allowing an
  equal yield for an equal effort.
• 4. To some degree, the model keeps property
  values equal through the aid formula.
•  

74
DPE Model Disadvantages

• This model does not equalize for per pupil
  expenditures because the local districts have the
  autonomy to determine spending levels.
• If a wealthy locality exceeds the guarantee, a
  recapture of funds goes back to the state to help
  poorer localities. This serves as a disincentive
  for localities to exceed the guarantee.
• A locality loses a degree of autonomy because the
  state may establish minimums and maximums.

75
 Full State Funding

• The state collects all funding and is fully
  responsible for financing public education
• State distributes funds to schools on an equal
  basis
• Localities cannot supplement the state funding
  with locally-generated revenue
• This model eliminates disparities and differences
  in funding the operation of schools

76
 Full State Funding Formula

• State Aid Total Education Spending
• Number of Pupils in the State

77
Comparison with Flat Grant Model

• Flat Grant Model
• Provides only the floor funding for school
  districts
• Allows for differences in spending
• Does not imply that this is all the funding
  available to schools

• Full State Funding Model
• Provides the ceiling of funding for the schools
• Allows only for the equal state funds for
  education
• This is all the funding available to public
  education

78
Advantages to Full State Funding

• First, education is a state function and this
  model places the financial burden of paying for
  education squarely on the state
• Second, this model does eliminate all spending
  variance for schools and appears to be fair to
  taxpayers and students by NOT making school
  funding a factor of local wealth or poverty

79
Advantages to Full State Funding, cont.

• Third, state funding virtually eliminates local
  property taxes to fund education
• Finally, reduced overhead costs occur as the
  state takes over much control of schools from
  local superintendents, central office staff
  members, and school boards

80
Advantages to Full State Funding, cont.

• Additionally, with local politics and fighting
  for local funding out of the way, more time may
  be allowed for curriculum, instruction, and
  professional development

81
Disadvantages to Full State Funding

• Reduces the appearance of local control.
  Citizens may feel that they have little or no
  impact on the large state operation of schools.
• Minimizes the appearance of local fiscal control.
  Wealthy areas may think their schools are not
  receiving sufficient funding. Poorer communities
  may not feel as if they have any investment in
  the schools.

82
Disadvantages to Full State Funding, cont.

• The state aid may not reflect schools diverse
  needs. Equal funding for a school with 5 of its
  students receiving special education services
  versus 20 of its students in special education
  programs may not provide what is actually needed.
  
• Finally, the state-set spending may not be
  sufficient to meet the needs of the entire
  educational system.

83

• As Deborah Verstegan states,
• There have been no new approaches developed or
  used to distribute state aid to school systems
  since the 1920s and 1930s.

84

• In that time frame, fewer than one third of the
  eligible population attended high school much
  less graduated. As late as 1950, only about one
  third of the population graduated from high
  school. The graduation rate for black males was
  12.6 and 14.7 for black females.

85

• Today, student performance accountability
  programs expect all students to achieve to high
  levels. Under the NCLB legislation, all
  sub-groups must make Adequate Yearly Progress.
• Nevertheless, our funding formulae to meet
  these expectations have not changed. The older
  funding models assumed a minimum education and
  not the high quality, high stakes testing
  programs that exist today.

86
Need for EducationFinance Reform
Economic competitiveness in a global marketplace
sustainability of our Social Security
Medicare Programs require that all U.S. students
receive an ADEQUATE not minimum education.