Public school reform, expectations, and capitalization: what signals quality to homebuyers?

• Author: Zahirovic-Herbert, Velma

1. Introduction

   Education is one of the most important services provided by local governments. Low test scores, high dropout rates, high teacher turnover rates, and other problems indicate that large urban school districts in the United States serve their students inadequately. These deficiencies provide incentives for affluent families to leave cities for the suburbs or to move their children to private schools. When these families move, urban tax bases and economic activity are reduced. When good students move to private schools, the average academic quality of the remaining public school students declines, which can reduce the quality of the education received in the public schools through influence on peer group effects and declining parental involvement and political support. For these reasons, education reform remains a key concern in urban areas.

   This paper draws on local education reforms that occurred in East Baton Rouge Parish, Louisiana, in 1996 and 2001 to examine several questions left unresolved in the capitalization literature, especially the literature concerned with how housing markets respond to different types of government-supplied information about school quality. Two policy events in the school district provide a rare opportunity in this regard; changes ordered by the federal court supervising the school district present natural experiments for observing the extent to which school characteristics are reflected in the housing market. More importantly for our purposes, the setting and the two policy events themselves highlight the roles of home owners' expectations on measured capitalization.

   As a legacy of a 40-year desegregation lawsuit, the local school system was under direct federal court control for more than 15 years. In the years preceding our first policy event, students were randomly assigned to individual schools in an effort to equalize racial composition, a method that eliminated school quality as a location-specific house attribute (e.g., it was not unusual for different children in the same family to attend different schools). (1) In a surprise move in the summer of 1996, the presiding judge ordered the elimination of random school assignment in favor of stable attendance zones, thereby creating a direct tie between house location and school quality. This change from random to zone school assignment represents a natural experiment and an opportunity to observe how the local housing market values the policy change. Further, in light of the history of the 40-year federal lawsuit and 15 years of direct court control of the local school system, the public had little confidence in the federal court's ability to improve education quality. The overwhelming defeat of a major school tax referendum following the court's creation of school attendance zones is evidence of this lack of confidence. This is precisely the type of environment in which we expect to find little or no systematic capitalization of measured school quality differences.

   There is evidence that public confidence in the school system improved during the next few years. Enrollments ceased their inexorable declines and stabilized within a few years and, more importantly, voters passed a major school tax referendum at that time as well. Both observations signal an important reversal in public opinion regarding the perceived viability of school reform. The second policy event in our study, major changes in school attendance zones in 2001, occurs after these observations. Thus, we argue that the second policy event, which changed the previously established attendance zones, occurs in an environment of fundamentally different expectations than the first policy event, which established those zones.

   In the second policy event, the redistricting affected the housing market both directly and indirectly. Many houses were assigned to new schools, changing their locational attributes directly. At the same time, even for those houses experiencing no change in school assignment, changes in attendance zone boundaries in other neighborhoods induced large changes in the characteristics of the students assigned to their schools, introducing indirect changes in school characteristics. This second event, therefore, also allows us to measure the extent to which families perceive different benefits from improving their children's current school versus sending their children to a different but better school.

   Finally, we also pursue an alternative direct test of the expectations-capitalization nexus. We examine Fischel's (2001) homevoter hypothesis--the notion that home owners vote for local policies that increase their property values and oppose those that do not. We draw on precinct-level voting outcomes on the second major school tax referendum to measure capitalization differences across precincts.

   The unique setting from which the data are drawn allows us to sidestep common difficulties encountered in other school quality capitalization studies. In particular, the single school district is coterminous with the unified city-parish government jurisdiction boundaries, a unique feature that minimizes spatial variation in local property tax rates and school spending, as well as other public services. (2)

   There is a decade and a half trend toward increasing school accountability as a part of education reform in the United States. There is, however, no consensus about how to make schools accountable in terms most useful to residents. The economic literature on how residents interpret school letter-grade or qualitative performance rankings yields mixed results (Figlio and Lucas 2002; Kane, Staiger, and Samms 2003). (3) Student test scores provide an alternative measure of school quality; Haurin and Brasington (1996) and Black (1999), for example, find positive relationships between standardized test scores and house prices. In a different vein, some education and labor economists suggest that school achievement might not be the proper measure of school quality. Instead, they suggest focusing on the growth in achievement scores over time as a measure of schools' value added (Hanushek and Taylor 1990; Hayes and Taylor 1996; Figlio 1999; Dowries and Zabel 2002; Brasington and Haurin 2006). Simply put, there is no broad agreement about the best way to measure school quality.

   Yet in addition to test scores, parents care about peer effects and the environment in which their children are learning, including the socio-economic and demographic composition of the student body. While Hoxby (2000) and Hanushek, Kain, and Rivkin (2002) examine peer effects and their relation to school performance, few recent studies consider direct student peer effects as measured by the socio-economic characteristics of the students in the school and their impact on house values. There is, however, evidence that these factors can matter. Weimer and Wolkoff (2001), for example, show that ignoring the percentage of an elementary school's student body that receives reduced-price lunch results in substantially larger house price capitalization estimates for elementary test scores.

   Our results add to this body of evidence. The difference between capitalization effects of the first policy event, which established attendance zones, and the second policy event, which changed the zones five years later, reveal the strength of community expectations mediating capitalization of reported school quality differences. In particular, once the population had experienced stable school attendance zones, as well as a degree of local school board control over education management during the years 1996-2001, the housing market responded to the attendance zone changes in 2001. While test scores are not systematically capitalized into house prices, variables that capture broader improvement or value-added, such as an improvement in categorical ranking of school performance, significantly increase house prices. We also find a direct tie between expectations and measured capitalization in the 1998 school tax referendum results, which is consistent with Fischel's (2001) homevoter hypothesis model of capitalization. We find that precincts supporting the tax referendum exhibit even stronger capitalization of school improvement than the pooled sample. At the same time, precincts opposing the referendum show no statistically significant capitalization of improved school rankings, whether the improved ranking is from better performance of a given school or from reassignment to a better school.

   The rest of the paper is organized as follows. Section 2 summarizes background information on the education reform experience in the East Baton Rouge Parish school system being studied. Section 3 describes the data and the empirical model. Section 4 exploits the initial establishment of attendance zones in 1996 to examine the extent to which the housing market values student test scores and peer composition. Section 5 draws from the changes in attendance zones in 2001 to investigate whether the market values direct improvements in the quality of a given school versus being assigned to a better school. Section 6 examines the expectations-capitalization nexus more closely, studying differences in capitalization of school quality ratings and peer group composition across precincts supporting and opposing an earlier school tax referendum. The final section concludes the paper.

2. Historical Background

   The East Baton Rouge Parish School System serves the greater Baton Rouge (Louisiana) metropolitan area. It is the third largest district in the state and among the top 75 nationally in terms of student enrollment. It is composed of 88 schools and approximately 45,000 students. The school system has gone through many changes because of its battle with a 40-year school desegregation law suit, Davis et al. v. East Baton Rouge Parish School Board (1956). In 1981, the federal court instituted a plan that closed...