LOCAL RESPONSES TO SCHOOL FINANCE EQUALIZATION: WEALTH OR PLACE?

Author:Combs, Alex
  1. INTRODUCTION

    One of the most salient current policy issues is the growing income and wealth gap within countries. While world wealth has grown and inequality across countries has diminished over the past three decades, the increased within-country inequality continues to create political and social challenges in the U.S. and other countries. Some of the gap in the U.S. is place-based and relates to long-standing deficiencies in human capital accumulation in those places. (1) Urban areas with highly educated populations have disproportionately attracted the industries that have experienced large wealth gains in recent decades. Rural areas, and especially rural areas with less educated populations, have stagnated or lost employment and wealth. For education policy, it is of great interest to note that the rising inequality within the U.S. has almost perfectly corresponded to the period in which states attempted to equalize education opportunities by diminishing local property wealth as the base for education revenues. Both scholars and policymakers have assumed that court cases and legislation that resulted in greater centralization of finance for schools at the state level would diminish the variance in expenditures across school districts within states. Greater equality would then reduce the human capital gap in the long-run.

    Empirical evidence generally supports the idea that revenue variance within states has been reduced by school finance equalization reforms (SFEs) (Murray et. al., 1998; Card and Payne, 2002, LaFortune et. al., 2016). There is less agreement regarding the effects of SFEs on economic or educational outcomes (Hanushek, 1986; 2006; Hanushek and Lindseth, 2009; Card and Payne, 2002; Jackson, Johnson, and Persico, 2016). (2) Particularly relevant to this paper is work by Cascio, Gordon, and Reber (2013) that found localities reduced their own source revenues following the introduction of Title I federal spending. In so doing, the local jurisdictions partially offset increases in federal spending.

    This paper looks at the revenue responses of local governments to a SFE in a single state, Kentucky. (3) In 1989, the Kentucky Supreme Court found that the state constitution required that "[e]ach child, every child,... must be provided with an equal opportunity to have an adequate education" (Rose v. Council for Better Education, emphasis in original). (4) Kentucky was the first state to implement a reform that emphasized "adequacy" of funding and not merely equal resources across districts (Lafortune et. al., 2018, p. 5). There were initially substantial increases in resources to districts in addition to a change in the formula for state aid (Clark (2003), Hoyt (1999) and Flanagan and Murray (2004). While the reform initially eliminated the gap in revenues between districts, after a period of almost 30 years, gaps in per pupil spending have re-emerged. (5)

    We examine evidence to determine whether the return of the gap is based on property wealth, whether it is based on "place", or whether both enter the explanation. (6) In the case of Kentucky, evidence suggests the response difference is explained by both initial property wealth and place. Increases in revenues from their own tax bases among the wealthiest districts now largely drive the disparities between districts. And, controlling for property wealth, income, and several other factors, districts located outside of Appalachia continue to generate more local revenues for their schools than those districts located in Appalachia. The findings suggest that progressive state formulae may not be sufficient to change long-standing patterns of spending. Like Jackson et al. (2018), this paper raises questions about the importance of the source of revenues for schools. (7)

  2. SCHOOL FINANCE BACKGROUND

    In the 1970s and 80s, economists devoted a great deal of attention to education finance issues. The academic interest was driven, in part, by the onset of court and legislative actions surrounding the equity of states' finance mechanisms. Because schools historically relied largely on local sources of revenues (typically property taxes), wide disparities in revenues between districts often resulted. Some of this reliance on local revenues stemmed from the history of public schools in the U.S. and the heavy role of towns and localities in providing subsidies to the schools. As late as 1930, schools still received over 80% of their revenues from the locality in which they resided (Toma, 2014).

    Critics of local funding and the property tax argued that reliance on local tax bases was inherently unfair to the children of lower property wealth districts. The California Supreme Court in 1971 agreed with the critics in its Serrano v. Priest decision. The California legislature responded with a plan that shifted more responsibility to the state and limited the extent to which localities could increase taxes on property. The California decision led to a wave of challenges to state funding systems across the United States. Over the next 25 years, courts in 43 states would hear cases regarding the constitutionality of the funding system for public schooling, and these court challenges continue today. Many states have followed the California lead and overturned their funding systems while others have not overturned their systems but have modified existing sources of revenues for schools. But even in states without a court challenge, states generally have been proactive in moving toward funding formulae that shift more responsibility to the state and away from local tax bases. The result of these changes in funding sources has been to reduce the average variance in funding across local districts within a state. (8)

    Implicit in the motivation to centralize funding at the state level and equalize revenues across districts is the notion that school expenditures and student achievement are directly linked. While there is a long history of research that casts doubt on this assumption (Hanushek, 1986, 1997, 2006), recent research regarding the link between funding and student achievement, and the role of educational expenditures more generally has been renewed (Hoxby, 2001; Murray et. al., 2004; Baicker and Gordon, 2006; Jackson et. al., 2016; Lafortune et.al., 2018). Lafortune et al. (2018) suggests that low-income and high-income districts have been roughly at revenue parity since 2001 because of the way in which funding has been allocated to schools over the past twenty-five years. They find that court reforms have reduced between-district inequities but because of the distribution of poor and minority students across rich and poor districts, the reforms have not reduced the gap between high and low-income students or the minority-white gap. Jackson et al. (2016) found positive long run improvements with relatively large coefficients on court-ordered spending variables over a host of measures of outcomes.

    But not all studies have found such large or positive improvements associated with finance reforms. Baicker and Gordon (2006) found that court orders requiring more state financing of schools and more progressivity have been followed by little evidence of more resources available for low-income districts, and this is especially true when examining the effect on other public services available to those districts. The reason for the overall static outcome in resources available in low income districts is the fact that state revenues are substituting for local revenues either directly to the schools or indirectly in the form of resources for other public services.

    Recent studies at the state level have begun to try to provide insights into why particular patterns of effects may be observed in the national studies (Conlin and Thompson, 2014; Hyman, 2016). Hyman, for example, finds evidence that there have been long-term gains in Michigan student outcomes beyond high school following state finance reform. Both college enrollment and degree receipt increased following Michigan's school finance reforms but he found that resources were directed toward schools serving wealthier families within districts.

    This paper looks at a single state, Kentucky, which adopted strong centralized finance reforms. Kentucky is interesting because it is generally considered to have been an influential case that inspired others "to go well beyond equality in spending and focus on ensuring that all students in the state have equitable access to adequate educational opportunities" (Flanagan and Murray, 2004, p. 195). Kentucky also offers the advantage of looking at the effects of centralization over the long run because the Court-ordered financial reform has been in place since 1990. In the spirit of Baicker and Gordon (2006), Cascio et al. (2013), and Hyman (2017), we look at the reaction of local school district funding decisions to a court-ordered formula for funding.

  3. THE KENTUCKY SETTING

    Historically, Kentucky relied heavily on the property tax to fund its schools. There was early recognition that this reliance resulted in inequalities in school funding related to tax capacity and there was an attempt in1952 to remedy the problem by introducing minimum funding from the state (Day, 2011). To participate in the state program, localities were required to tax the assessed value of property at a uniform rate. By 1976, enforcement of local effort had vanished and the program had become a flat grant to all districts funded by a state property tax. Legislation known as a Power Equalization Program (PEP) was passed in 1976 that provided state funds "to districts to supplement revenues raised through a local property tax at a state-set rate" (Flanagan and Murray, 2004, p. 197). State funds accounted for 63% of total school funding by 1989. But the PEP did not reduce the spending inequalities across districts. Failure stemmed from multiple causes including (1) the unwillingness of local...

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