School Finance Structures: Formula Options

1. School Finance Structures:Formula Options School Finance: A Policy Perspective, 3e Chapter 5 1

2. Overall School Finance Issues • Equal spending or equal access to tax base • Zero aid district, or equalization up to what tax base level • State and local costs, and how different formula designs can vary them • Equity impacts, including adequacy • Winners and losers 2

3. Fiscal Federalism • Advantages: • (1) fiscal capacity equalization; • (2) equitable service distribution; • (3) more economically efficient provision of the governmental service—education; and • (4) decentralized decision making authority • Intergovernmental grant theory 3

4. Intergovernmental Grants and Their Objectives • Two ways the central government (state or federal) can influence or coordinate the decisions of school districts in order to capitalize on the 4 advantages of fiscal federalism: • (1) central government can mandate changes in the way local services are provided, or • (2) central government can use intergovernmental grants to influence local behavior • This is more common (e.g., ESEA) 4

5. Intergovernmental Grants • Two types: • (1) general or block grants • (2) categorical aid 5

6. Unrestricted General Aid • School finance equalization grants • Increase a district’s revenue but do not place restrictions • Therefore, unrestricted aid is the least effective in getting districts to change behavior in line with expectations. On the other hand, they allow districts to decide how to use funds for local needs and priorities. • Research shows that typically districts use a portion of unrestricted aid to reduce taxes and a portion to increase overall spending 6

7. Matching General Grants • Link the level of state general-aid assistance at least in part to the level of effort made by the local school district, as well as to its fiscal capacity • Most common is the Guaranteed Tax Base (GTB) • Often called percentage equalizing, guaranteed yield, or district power equalizing • The goal is to equalize the revenue-raising ability of each school district, at least up to some point • Analyzed in terms of how they change the relative tax prices districts pay for educational services 7

8. Categorical Grants • Provided to school districts for a specific reason or purpose, and often come with strict application, use, and reporting requirements • Used to ensure that school districts provide services deemed important by the state or federal governments (e.g., to meet the needs of a specified population, such as Title I or specific district functions, such as transportation) • Districts receive based on either a sociodemographic characteristic (e.g., incidence of poverty) or the number of children meeting a specific criterion (e.g., learning disabilities) 8

9. Rules and Regulation of Categorical Grants • The maintenance of effort provision—requires districts to prove that spending on the supported program from its own funds does not decline as a result of the grant • Audits and evaluations—to ensure that recipient districts establish programs designed to meet the purpose or goals of the grant program • Many also have specific reporting requirements that help the government monitor use of the funds 9

10. The Impact of Categorical Grants • Research shows categorical grants usually stimulate educational expenditures by at least the level of the grant, and sometimes more • Present a different trade-off between equity and efficiency than do general grants • More centralized • Since designed to provide assistance to groups of students or to districts on the basis of some characteristic; categorical grants are not generally designed to equalize fiscal capacity 10

11. Flat Grant • Value—the bottom and local control • How it works: • Policy parameters: just the level of the flat grant • The higher the flat grant, the higher the cost • Grant characteristics and impacts • Minimum spending up to flat grant level • Impact on equity: • Modest unless really large, raises the mean, so CV falls as flat grant rises 11

12. Foundation • Value—the bottom and local control • How it works: • Similar to flat grant but jointly S/L funded • Policy parameters: foundation expenditure and RLE, for both • How high and how determined • The higher the foundation expenditure, the higher the cost and the better the equity; the higher the RLE, the lower the state costs • Zero aid district 12

13. Foundation, Continued • Grant characteristics and impacts • Minimum spending up to some level • Jointly state and local funded • Grant size is linked to local fiscal capacity • Impact on equity: • The higher the foundation expenditure level, the better all equity statistics, but the higher the foundation level, the higher the costs 13

14. Foundation Program Variations • Impacts on zero aid, state/local costs, equity, winners and losers when you: • Raise foundation expenditure level • Raise foundation expenditure level by $100 increments • Raise RLE, and at different foundation expenditure levels—who wins, who loses 14

15. Strengths of the Foundation Plan • Focuses on the bottom—1/2, 3/4, etc. • Provides a minimum spending level • State aid is linked to local wealth • Can be tailored to differentially impact low and high wealth districts • Most directly linked to the adequacy issue • Helps fix the “new” school finance problem 15

16. The GTB Program • Various names—GTB, DPE, guaranteed yield, percentage equalizing, etc. • Value—local control, allows for spending differences, access to a tax base • How it works: • Provides equal tax base, up to GTB • Policy parameters: GTB and any cap • How high and how determined—% kids, % districts 16

17. GTB, Continued • Grant characteristics: • Fiscal capacity equalizing • Jointly state and local funded, but higher cost as GTB rises unless tax rate caps for aid • Aid linked to both local wealth and level of spending • Local district decides on spending level • Lowers “price” of education services, so it is a stimulus to spending on education 17

18. GTB, Continued • Equity impacts: • Enhances all equity statistics in state with the “traditional” school finance problem • Exacerbates equity statistics in state with the “new” school finance problem 18

19. Impact of Various GTB Programs • What happens re zero aid, state/local costs, equity, winners and losers when you: • Raise or lower GTB • Raise or lower GTB with tax caps for aid, which limits GTB aid up to certain spending levels 19

20. Strength/Weakness of GTB • Focuses on core school finance problem— unequal access to a tax base • State aid linked to fiscal capacity (and level of spending) • Can make a minimum expenditure if require minimum tax rate (do via foundation in simulation) • Retains local decision making on spending 20

21. Combined Foundation and GTB Programs • Value—combines concern for the bottom half and local choice • How it works: two-tiered, usually a foundation with a GTB on top • Grant characteristics and impacts: ensures a minimum base spending level and ensures equal education spending per pupil for equal tax rates above the foundation required tax rate • Impact on equity: the GTB tier • Examples: Missouri, Texas, and Kentucky 21

22. Full-State Funding and State-Determined Spending Programs • Value—horizontal equity • How it works: sets an equal expenditure per-pupil level for all districts • Grant characteristics and impacts: can take several forms: • The state sets the expenditure level and districts cannot spend any more or less than this amount (Hawaii) • The state requires a uniform statewide property tax rate for schools and sets state aid as the difference between what that would raise and the total revenues needed to provide the equal spending level (New Mexico & Vermont) 22

23. Full-State Funding and State-Determined Spending Programs, Continued • Revenue limit program—the state sets a base spending per-pupil level for each district and finances it with a combination of state and local property tax revenues (California) • The state has a combination foundation and GTB program, but the GTB program has an absolute maximum tax-rate cap. Since most districts are at the cap, and since the GTB is higher than the wealth of most districts, the structure comes close to being the equivalent of a full-state funding program (Florida). • Impact on equity: these programs achieve perfect or almost perfect equity 23