1 Education 1 - Funding © Allen C. Goodman, 2014

2 Some Numbers Government puts together lots of numbers. Good source – Digest of Education Statistics,

3 Share has risen but not that much

4 Compare it to Health

5 Differences What are the differences in the sectors?

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Michigan benefits higher Michigan wages lower

9 General Issue Equality of Funding We looked at this a little bit earlier on. Suppose you have 2 districts –District 1 – Tax Base = $200,000 –District 2 – Tax Base = $100,000 If they both have a 2.5% property tax rate, then D 1 will raise $5,000 for schools, while D 2 will raise only $2,500 for schools. For D 2 to raise as much they must pay double the tax “price.”

10 Opportunity Most of our Tiebout discussion has to do with localities picking their tax rates and their levels of public services. It suggests however that poorer people will get lower levels of public services. Many view this type of thing as “unfair.” Premise here is that unequal inputs  unequal outputs. We’ll talk more about outputs in next class.

11 Various Ways to Equalize Aid Try to equalize expenditures Try to equalize the tax base –Fisher argues that the tax base equalization could induce districts to spend more, by decreasing the cost per $ spent.

12 GTB Formula (and worksheet)worksheet Consider a formula of the type: G i = B + (V* - V i ) r i, where: G i = grant B = Basic or Foundation Grant V* = Guaranteed per-public tax base V i = Per pupil tax base in district i. r i = Tax rate per thousand dollars in district i. Difference to make up Tax effort!

13 GTB Formula (and worksheet)worksheet Consider a formula of the type: G i = B + (V* - V i ) r i, where: G i = 0 + ($200,000 – $50,000) ($40/$1,000), where: G i = grant B = Basic or Foundation Grant V* = Guaranteed per-pupil tax base V i = Per pupil tax base in district i. r i = Tax rate per thousand dollars in district i. G i = $6000; own effort = $2000 If you raise r by $1 in your district, it is raised by (V* - V)/V times; Here (200 – 50)/50. So a $1 tax gets a $3 match. Implicit tax price = 1/(1+3) or 25%. Let’s look at spreadsheet.spreadsheet

14 Do these grants  more spending? Really depends on the price elasticity of demand for education. If demand is price inelastic, quantity of education will not rise. Grants will simply replace existing $. Ed Spending All Else E* A* A** E**

15 Hoxby (2001) Looks at states in Relates characteristics of state’s financing systems to actual spending. Spending increased with GTB formulas and lower tax prices for low-wealth, low- spending districts, but … Substantial amount of equalization comes by limiting the highest spending districts  called “leveling down.”

16 Coefficient of variation The coefficient of variation is a dimensionless number that allows comparison of the variation of populations that have significantly different mean values. It is often reported as a percentage (%) by multiplying the above calculation by 100. Idea: If you’re comparing high income districts to low income districts, you might expect the high income districts to vary a little more because there’s more of a “top end.” CV controls for the higher mean.

17 Examples – D1, D2, D3 are distributions of School Districts

18 Michigan School Finance Prior to 1974, CV was about By 1980, it was 0.17, and by 1994 it had increased to In 1978 local property taxes  about ½ of school revenue. By 1994 local property taxes  about 2/3 of revenue. Property tax burden was 7 th highest in US.

19 In 1994 – new system Foundation guarantee, F –F is determined by 1993/4 level, plus allowed annual increases. –Districts > $5,000 get % increases equal to % growth of state school aid revenue multiplied by basic foundation (which started at 5000). –Those below $5,000 receive up to double these percentage amounts.

20 18 Mills = 1.8% Each district is supposed to levy 1.8%. State provides the rest. Highest spending districts levy additional property taxes to reach the levels they want. Over time foundation grows, and would presumably lower CV. State largely substituted itself for the local property tax base. If state $/student were larger than locality, local tax bite fell.

21 Cullen and Loeb (2004) 1.State now generates more than 75% of funding for schools. 2.Most of the funding comes from increase in state sales tax from 4% to 6% 3.Level of school spending increased by 9% (real) from 1990 to CV fell from 0.22 in 1991 to 0.13 in Cullen, Julie Berry and Susanna Loeb, “School finance reform in Michigan: evaluating Proposal A” in J. Yinger, ed., Helping Children Left Behind: State Aid and the Pursuit of Educational Equity (Cambridge, MA: MIT Press), pp

22 Issues Although inputs , did outputs  ? Some high spending districts were not allowed to spend as much as they would like. –Solution? Fees like athletic or music fees. –Stop providing items where there are plausible private substitutes – e.g. driver training.

23 More Issues Per pupil funding, while plausible, can impose hardships on districts with falling enrollments. Consider SD with: –4 elem schools (50 students/grade * 5 grades each) = 1000 students –1 middle school (200 students/grade * 3 grades) = 600 students –1 HS (800 students over 4 grades) 2400 Students

24 More Issues Consider SD with: –4 elem schools (50 students * 5 grades each) = 1000 students –1 middle school (200 students * 3 grades) –1 HS (800 students) Suppose enrollment in ES falls by 4 students/grade = 8%, or 2 students/class. Fall of 80 students. ES Funds fall by 8%. Total students  by 3.3%. What do you cut?

25 Suggests Short term problems in all areas where schools are growing. Places like southern Oakland County. –Ferndale, Royal Oak, Hazel Park are losing students. –Walled Lake, South Lyon are gaining students. You have about the same numbers of students, but you have schools in the wrong places. Political problems consolidating and/or closing schools. Look at City of Detroit! Is this formula necessarily bad? Is there something better?