Report Highlights Underlying Causes of Finance Inequity

Last Updated: September 26, 2012

This article appeared in the September 2012 Rural Policy Matters.

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A state-by-state analysis by the Center for American Progress examines how states fund schools and how that system stacks up along a range of measures.

An extensive report by the Center for American Progress (CAP) examines the school funding mechanisms of six states with high levels of inequity among school districts. It finds that combined state and local revenues and other school resources are significantly lower in higher-poverty districts than they are in lower-poverty districts. The six states are Illinois, Texas, New York, Pennsylvania, Missouri, and North Carolina.

“The Stealth Inequities of School Funding: How State and Local Finance Systems Perpetuate Inequitable Student Spending,” identifies a number of specific components in the funding systems of the six states that work against poor students and poor school districts. The report’s authors, Bruce Baker and Sean Corcoran, note that there is little dispute over the existence of  significant funding gaps among schools in the U.S.

Baker and Corcoran conclude that there are many drivers of inequity, including, but not limited to, property value variances and related uneven local contributions to schools. While the ability of local districts to raise revenue is generally a function of local taxable property wealth, the goal of state aid systems should be to compensate for local capacity. Yet the formulas of many states fail to equalize dollar inputs for students.

The CAP study attempts to identify the most important root causes of inequity.

State aid inequity drivers

The first chapter of the report, authored by Bruce Baker, analyzes the state aid mechanisms in the six states. It categorizes the drivers of inequity into three general categories: 1) state aid that is flat for all districts or that underutilizes equalizing formulas; 2) inequitable categorical aid; and, 3) property tax relief.

Editor's Note: These and other funding factors that have a negative impact on rural schools are discussed in more detail in the RSFN Special Series, "Characteristics of Strong Rural Finance System." The series reviews ten characteristics of state funding systems that support rural schools and their unique circumstances and needs. You can find links to all ten installments in the series here. The CAP report underscores many of the principles delineated in that series.

Flat or under-equalized formulas. Many states, like North Carolina, allocate state funding to districts that don’t need high levels of state support to fund schools adequately. North Carolina’s entirely unequalized formula essentially provides block grants to districts on a per pupil basis and does not address student need or local capacity. The state does have other small low wealth district cost adjustments that are added on top of the basic formula, but they are not significant enough to make much difference.

State formulas that rely on unequalized per pupil allocation methods generally reflect the political influence of wealthier districts and are very difficult to disrupt. Usually any changes to the formula include a minimum aid provision or hold-harmless clauses so that wealthier districts do not lose state aid. Such provisions guarantee that inequities will persist.

Another disequalizing factor is the use of Average Daily Attendance (ADA), rather than Average Daily Membership (ADM), to determine the student count for the district. ADA, which Missouri uses, punishes high-poverty districts, where low-income students face more challenges to attendance, by under-counting enrollment.

Inequitable categorical aid. Many states operate several formulas at once. Usually this means there is a general aid formula plus additional categorical aid. Categorical aid is generally distributed through formulas or weights for certain groups of students or for special programs like a reading or science initiative targeted to schools where achievement is lagging.

Baker finds that categorical aid also contributes to inequity when it is not adjusted for local capacity or the specific circumstances of districts. For example, states may provide additional funding for low-income students. However, if low-income student weight is the same for districts with low and high poverty rates, the weight is inequitable. Or, if the weight is the same for high-wealth districts with strong ability to raise local revenues, it is inequitable to low-wealth districts.

States also punish poor districts through funding mechanisms that set a floor or cap for categorical aid. For example, some states assume the percentage of special education students is the same in every district. Categorical aid can be progressive if targeted to legitimate need. However, if state aid does not account for both need and circumstances, it promotes inequity.

Property tax relief. Targeted tax relief can also work to benefit districts that have the greatest local fiscal capacity, often by reducing tax on expensive houses and properties. Baker refers to this dynamic as “unequalization aid.”

Ideally, state aid formulas offset funding inequities that arise as a result of differing property values and the resulting differences among school districts in their abilities to generate local revenue through property taxes.

However, the report notes that in many states, including New York and Texas, property tax relief has ultimately enriched wealthy districts. This can occur in several ways. For example, when states cap property tax rates, or yields, and make up the difference with state aid, wealthy districts essentially get what amounts to a state subsidy. Sometimes such subsidies have the effect of re-distributing state aid from lower wealth to higher wealth districts. Some states, including Missouri, have initiated sales-property tax exchanges. These have the same effects as property tax relief if funds from sales tax revenues are not distributed progressively and when sales revenues fall short of projections.

Disparity in local revenue

Sean Corcoran, who authored the report’s second chapter, reviews the role of local revenue in disparities among districts. He concludes that inequities result less from disequalizing factors in state aid than from the failure of state formulas to address disparity in property values.

The report finds that in the six example states, districts rely heavily on property taxes for the local share of education. Moreover, property taxes are negatively related to poverty and disproportionately contribute to inequity. Corcoran notes that it is possible to offset property tax variances with a progressive system of state aid, but these six states do not. 

In Illinois, for example, the formula relies heavily on local funding, and almost all districts tax at rates higher than the minimum level required to receive state aid.

In Missouri, high poverty districts receive much less revenue than low poverty districts, even though the state allows districts to collect revenue from several local sources.

North Carolina’s high poverty districts also collect special and supplementary taxes in addition to property taxes. Even so, their revenues fall far short of those in property wealthy districts. This means low wealth districts have far less ability than high-wealth districts to supplement the salaries of teachers and school leaders.

New York has wide disparities in local tax rates and expenditures, and these are not mitigated in the state aid formula. In addition, New York’s tax relief program also benefits high wealth districts. A forthcoming property tax cap will further harm low wealth districts, many of which tax themselves at high rates. The cap will require a supermajority vote to override.

In Pennsylvania, school revenues are closely tied to local wealth. Resulting inequities are intensifying as the state share of education funding is decreasing.

Texas districts tax themselves at very high rates. But high-wealth districts produce higher yields for their efforts, meaning they can tax property at lower rates and still generate significant revenue.

Corcoran’s findings confirm previous findings that heavy reliance on local property taxes for school funding is a significant source of inequity

Policy recommendations

Baker makes several specific policy recommendations. These include utilizing an equalizing formula for as much state aid as possible; eliminating property tax relief/subsidies that enable higher spending in already-wealthy districts; and reducing “outside the formula” spending such as categoricals that are not adjusted for student or district circumstances. Baker also recommends that policymakers and advocates examine their formulas to identify “stealth” sources of inequity, including politically protected funding streams.

Baker suggests that in severe cases, such as North Carolina, where there is little effort to target funding to need, federal agencies should intervene. Another CAP report released in August also implicates federal action. That report, “Students of Color Still Receiving Unequal Education,” demonstrates that inequities fall largely along racial lines.

Corcoran makes few specific policy recommendations regarding the overreliance on property taxes, but he cites New Jersey and Ohio as examples of funding systems that mitigate inequity driven by property tax disparities with progressive state aid systems.

Inexplicably, Corcoran closes his chapter with a call for district consolidation in Illinois, Pennsylvania, New York, and Missouri as a method for reducing inequity. However, he cites no evidence to support this strategy. The recommendation is particularly hard to understand given that North Carolina, one of the most highly consolidated states in teh country is, as noted in this report, also one of the most inequitable. In addition, the consolidation recommendation failes to account for funding inequities among schools within the same district as documented in the CAP report, “Funding Education Equitably.”

“The Stealth Inequities of School Funding: How State and Local Finance Systems Perpetuate Inequitable Student Spending” is an important follow-up to other work in which Baker has documented that inequitable and inadequate school funding are at the root of many other educational inequities.

In his blog, School Finance 101: Inexcusable Inequalities!, Baker says, “the bottom line is that equitable and adequate financing of schools is a necessary underlying condition for everything else.” And, in the post “School Funding Myths” he writes that it is possible to “show that state school finance reforms matter. Shifting the level of funding can improve the quality of teacher workforce and ultimately the level of student outcomes and shifting the distribution of resources can shift the distribution of outcomes.”

See the RSFN Special Series, “Characteristics of Strong Rural School Finance Systems” for more information on the characteristics of state funding systems that support rural schools.

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Read more from the September 2012 Rural Policy Matters.