Chapter 9 The Structure of School Finance

Systems

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

School Finance Relationships

• Political• Financial • Control• Direction

Whoever funds schools controls its direction and practices.

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

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

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

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

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

Number of Students per School District, 1939-40 and 1999-2000

  1939-40 1999-2000

Total School Enrollment

25,434,000 46,857,000

Number of School Districts

117,108 14,928

Students per School District

217 3,188

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

 

School Year

Federal% funds

State% funds

Local% funds

1919-20 0.3 16.5 83.2

1939-40 1.8 30.3 68.0

4.4

1999-00 7.3 49.5 43.2

1959-60 39.1 56.5

1969-70 8.0 39.9 52.1

1979-80 9.8 46.8 43.4 1989-90 6.1 47.1 46.8

% of Revenue by SourceRegion & State Federal State Local

50 states and DC 7.3 50.2 42.5

       

New England 5.3 48.1 46.6

Mid East 6.7 37.9 55.5

South East 9.1 55.0 35.9

Plains 7.2 47.3 45.6

Far West 8.4 61.0 30.6

Federal Revenue Sources• The New England

states have the lowest percentage of federal revenue source at 5.3%

Federal Revenue Sources, cont.

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

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%

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%

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%Localrevenues

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

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

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

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

 

State Responsibilities & Politics

• The Department of Education is generally responsible for carrying out the state’s education legislation

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

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

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

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

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.

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

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

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

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

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

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.

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

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

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 everyone’s 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

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 locality’s ability to fund services

• Designing a workable funding formula becomes an increasingly difficult process

• 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

• 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

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

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

An Example:Equalization 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%

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

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

The Next School Finance Leaders, cont.

• The 3rd generation of school finance scholars (late 1970’s 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

Current U.S. State School Finance Systems

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

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

Flat Grants Model

Amount of state aid per pupil =

Total State RevenueNumber of Pupils in the State

Example of Flat Grants School District

LocalRevenu

e

Flat Grant

Flat Grant % of Total

Total Spendin

gA $1,000 $1,000 50% $2,000B $4,000 $1,000 20% $5,000C $7,000 $1,000 12.5% $8,000D $9,000 $1,000 10% $10,000E $11,500 $1,000 8% $12,500

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 locality’s 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

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

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

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

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

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

Foundation Plans Formula 1. State Funding Guarantee = # of

Pupils X $ Guarantee of Plan (constant)

2. Local Share = Required Local Tax Rate (constant) X Local Assessed Valuation

3. State Aid = Total Foundation Guarantee – Local Share

Calculation: Foundation Funding Schoo

lDistri

ct

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

• 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 state’s share for School District E will be $1,000 per pupil.

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

Summary of Foundation Formula

SchoolDistric

t

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

• 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

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)

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

District Power Equalizing • District power equalizing (DPE)

is virtually the same as: • Guaranteed tax yield (GTY)

and

• Guaranteed tax base (GTB) programs

DPE Model Concepts 1. The ability to generate

revenue should be equalized among the districts in the state. The locality should determine how much.

DPE Model Concepts, cont. 2. Local variance in fiscal

capacity is neutralized. Education quality is a function of state – not local – wealth. An equal yield for an equal effort.

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.

District Power Equalization Formula

State Aid = Local Tax Rate X Guaranteed Yield – (Local Assessed Valuation X

Local Tax Rate).

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

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

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

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

DPE Model Advantages1. 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.

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.

 

DPE Model Disadvantages1. This model does not equalize for per pupil

expenditures because the local districts have the autonomy to determine spending levels.

2. 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.

3. A locality loses a degree of autonomy because the state may establish minimums and maximums.

 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

 Full State Funding Formula

State Aid = Total Education Spending Number of Pupils in the

State

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

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

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

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

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.

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.

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.”

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.

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.

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.