The school money puzzle.

• Author: Mackey, Scott
• Position: Public school financing - Includes related articles on K-12 education and public school enrollment

The ever-present problem of equitable financing for public schools continues to haunt lawmakers and judges.

For public education in 1998 state budgets, it was the best of times and the worst of times.

Why the best of times? Spending growth in K-12 education outpaced all other major programs for the first time in over a decade. State general fund education spending rose by 6.7 percent in FY 1998, more than twice the rate of inflation and well above inflation plus enrollment growth (an average of 4.1 percent in 1998). Five states had double digit spending growth, and all but 10 states increased real per pupil spending.

State and local governments are wiring classrooms for the Internet, reducing class sizes and developing statewide performance measures for students. They are offering choices for parents and students, either through public school choice, charter schools or, in a few instances, vouchers.

Public education is the top policy issue in most states. Legislators from both parties are competing for the title of "education friendly." The Republican Governors' Association declared 1998 the year of education. And Congress and the president are trying to convince voters of their commitment to education, even though federal funds represent just a small fraction of K-12 spending.

But are these also the worst of times for public education? The public is demanding more choice and accountability in education, and public opposition to vouchers, charter schools and other alternatives to traditional schools is waning. States like Colorado and Maryland, which have implemented statewide testing of new academic standards, are releasing disappointing results.

States with high enrollment growth, like California and Arizona, are falling behind in their efforts to build new schools and keep existing schools properly maintained. And even in the Northeast and Midwest where enrollment growth has been slow, stories of crumbling schools fill the media.

Finally, state school finance systems continue to face critical scrutiny from the courts. Arizona is still trying to satisfy court demands that it come up with a fairer way to fund capital construction, while Ohio and New Hampshire courts want the states to revamp their programs for distributing aid for school operations. Federal policymakers and the national media continue to chide states for funding inequities, despite major reforms in some states.

WHOSE RESPONSIBILITY?

Education funding was primarily a local responsibility until the 1930s, when the deflation in real estate prices during the Depression undermined the property tax. States used money from newly enacted sales and income taxes to fund schools, with the state share more than doubling from 17 percent in 1930 to 40 percent in 1950. Since 1950, however, the state share has not increased very much - it peaked at just under 50 percent in 1988 and fell back to 45 percent in 1994.

The federal government's minor financing role in K-12 education began in the 1960s and expanded throughout the 1970s, peaking at 10 percent in 1979. The federal share, which provides funding supplements for poor school districts and helps localities pay the cost of educating handicapped kids, has since dropped to about 7 percent. Interestingly, federal funding growth in the 1960s and 1970s supplanted local money, while the state share remained constant. When the federal share dropped in the 1980s, it was the states that made up most of the difference.

Despite many attempts to equalize funding between rich and poor districts, there are still wide disparities across the country in the portion of education funded by the state. For example, Hawaii uses no local revenue for schools while New Hampshire's state share is less than 10 percent. Even excluding these two extremes, the state share varies considerably.

The sheer size of education budgets - one-third of all general fund spending - means that school funding reflects the underlying condition of state finances. During the economic boom of the mid- to late-1980s, the state share of education funding peaked at 49.5 percent in FY 1988. Just six short years later, with states struggling to emerge from the recession, the state share had fallen to 45.2 percent. What did this mean in dollars? From 1988 to 1994, local expenditures increased by $50 billion while state expenditures increased by $33 billion. Although figures on state and local spending are not available after FY 1994, it appears that four consecutive years of healthy state finances - plus a major tax and school finance shift in Michigan - will again boost state education spending above local spending in 1998.

CYCLICAL FINANCES

This cyclical nature of state school finance creates two big problems for policymakers. First, slower state...