1. Chapter 9 The Structure of School Finance Systems

2. 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

3. School Finance Relationships
Political
Financial
Control
Direction
Whoever funds schools controls its direction and practices.

4. 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

5. Consolidation for Efficiency
Once local oversight was relegated to neighborhood schools and school boards
The trend over the last 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

6. Consolidation for Efficiency, cont.
Gradually over the 20th century, the states assumed more responsibility to oversee education
In , the first year keeping such statistics, the U.S. had 119,001 school districts
In , the total number of school districts totaled 14,859

7. 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

8. 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

9. Number of Students per School District, 1939-40 and 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

10. 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

11. School Year Federal % funds State Local 1919-20 0.3 16.5 83.2 1939-40
School Year
Federal
% funds
State
Local
0.3
16.5
83.2
1.8
30.3
68.0
4.4
7.3
49.5
43.2
39.1
56.5
8.0
52.1
39.9

12. % of Revenue by Source Region & 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

13. Federal Revenue Sources
The New England states have the lowest percentage of federal revenue source at 5.3%

14. Federal Revenue Sources, cont.
The Southeast states, on the other hand, have the highest revenue percentage from federal sources at 9.1%

15. 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%

16. 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%

17. 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%
Local
revenues

18. Federal Responsibilities
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

19. 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

20. 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

21. 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

22. State Responsibilities & Politics
The Governor influences education through their campaign platforms, whom they appoint in leadership positions once elected, and their position’s sheer bully pulpit
The Department of Education is generally responsible for carrying out the state’s education legislation

23. 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

24. 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

25. 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

26. 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.

27. Advantages of “Layered” School Financing
Equalization due to fiscal capacity of the states and the localities
Equitable & adequate distribution of educational services
Efficient provision of educational services
More decentralized decision-making authority to meet the states and localities’ needs
[1] Rosen, Harvey Public Finance (6th Edition). Boston: Irwin/McGraw Hill.

28. 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
[1] Rosen, Harvey Public Finance (6th Edition). Boston: Irwin/McGraw Hill.

29. 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

30. 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

31. 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
Localities tend to grow where young families with school-aged children want quality education services and are willing to pay for such services. In communities with higher concentrations of retired individuals living on fixed incomes, the desire for services may be related to other factors.

32. 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.

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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%

42. 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

43. 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

44. 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

45. Current U.S. State School Finance Systems
Flat grants
Foundation plans
District power equalizing
Full state funding

46. 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

47. Amount of state aid per pupil = Number of Pupils in the State
Flat Grants Model
Amount of state aid per pupil =
Total State Revenue
Number of Pupils in the State

48. Example of Flat Grants School District Local Revenue Flat Grant
Flat Grant % of Total
Total Spending A
$1,000
50%
$2,000 B
$4,000
20%
$5,000 C
$7,000
12.5%
$8,000 D
$9,000
10%
$10,000 E
$11,500 8%
$12,500

49. 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

50. 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

51. 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

52. 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

53. 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

54. 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

55. Foundation Plans Formula
State Funding Guarantee = # of Pupils X $ Guarantee of Plan (constant)
Local Share = Required Local Tax Rate (constant) X Local Assessed Valuation
State Aid = Total Foundation Guarantee – Local Share

56. Calculation: Foundation Funding
School
District
Local Required Effort = Per Pupil Equalized Property Value times 10 mills
State Share = Guaranteed Foundation minus Required Local Effort A
$100,000 x = $1,000
$5,000 - $1,000 = $4,000 B
$200,000 x = $2,000
$5,000 - $2,000 = $3,000 C
$250,000 x = $2,500
$5,000 - $2,500 = $2,500 D
$300,000 x = $3,000
$5,000 - $3,000 = $2,000 E
$400,000 x = $4,000
$5,000 - $4,000 = $1,000

57. 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.

58. 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

59. Summary of Foundation Formula
School
District
Local Required Effort
State Share
Foundation Level Spending
Leeway Funding
Total Per Pupil Spending A
$1,000
$4,000
$5,000 $0 B
$2,000
$3,000
$100
$5,100 C
$2,500
$250
$5,250 D
$500
$5,500 E
$6,000

60. 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

61. 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)

62. 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

63. District Power Equalizing
District power equalizing (DPE) is virtually the same as:
Guaranteed tax yield (GTY)
and
Guaranteed tax base (GTB) programs

64. DPE Model Concepts
The ability to generate revenue should be equalized among the districts in the state. The locality should determine how much.

65. DPE Model Concepts, cont.
Local variance in fiscal capacity is neutralized. Education quality is a function of state – not local – wealth. An equal yield for an equal effort.

66. 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.

67. District Power Equalization Formula
State Aid =
Local Tax Rate X
Guaranteed Yield –
(Local Assessed Valuation X Local Tax Rate).

68. District Power Equalization Formula Example
(Equivalent to a $100,000 Guaranteed Tax Base) 
Guaranteed
Tax Rate Revenue Yield
5 mills $
10 mills $ 1,000
15 mills $ 1,500
20 mills $ 2,000

69. 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 9
$360
$4,140
$4,500 C
$100,000 10
$1,000
$5000 D
$150,000
$1,350
$3,150 E
$300,000
$2,400
$1,600

70. 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

71. 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

72. DPE Model Advantages
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.

73. 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.

74. DPE Model Disadvantages
This model does not equalize for per pupil expenditures because the local districts have the autonomy to determine spending levels.
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.
A locality loses a degree of autonomy because the state may establish minimums and maximums.

75.   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
The formula appears similar to the flat grant model, but there are major differences.
Under this plan, the state is fully responsible for funding the schools.

76. Full State Funding Formula
State Aid = Total Education Spending
Number of Pupils in the State
The formula appears similar to the flat grant model, but there are major differences.
Under this plan, the state is fully responsible for funding the schools.

77. Comparison with 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

78. 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

79. 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

80. 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

81. 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.

82. 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.

83. 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.”
Verstegan, Deborah A. “Financing the New Adequacy: Towards New Models of State Education Finance Systems That Support Standards Based Reform.” Journal of Education Finance, 27 (Winter 2002), p. 755.

84. 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.
Verstegan, Deborah A. “Financing the New Adequacy: Towards New Models of State Education Finance Systems That Support Standards Based Reform.” Journal of Education Finance, 27 (Winter 2002), p. 755.

85. 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.
Verstegan, Deborah A. “Financing the New Adequacy: Towards New Models of State Education Finance Systems That Support Standards Based Reform.” Journal of Education Finance, 27 (Winter 2002), p. 755.

86. Need for Education Finance 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.