Reflection

Owings, W. A., & Kaplan, L. S. (2019). American Public School Finance (3rd ed.). Taylor & Francis. https://bookshelf.vitalsource.com/books/9781351013772

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Chapter 6: Fiscal Capacity and Fiscal Effort

FOCUS QUESTIONS

1 Identify the factors that help determine fiscal capacity.

2 Discuss how fiscal capacity measurements can be compared.

3 Summarize the complexities in determining fiscal capacity.

4 Identify the factors that influence relative fiscal effort.

5 Define fiscal effort in terms of how a state values education.

6 Explain the factors that influence the relationship between fiscal capacity and fiscal effort.

7 Summarize the complexities of calculating fiscal effort.

8 Discuss how U.S. fiscal effort for education compares with other countries.

In this chapter we discuss the idea of fiscal capacity—the financial resources available to fund public

services—and fiscal effort—how much of that capacity is used to fund education. First, we discuss the factors

associated with capacity and describe how to measure and compare those factors from local, state, and

national perspectives. Adjustments to capacity to allow for variance in costs of living are shown. Second, we

discuss fiscal effort, explain how it is determined and calculated, and consider how much of our relative local,

state, and national wealth we use for education.

FISCAL CAPACITY: THE ABILITY TO FUND EDUCATION

Capacity reveals the ability of a locality, state, or nation to fund those services it deems important. Fiscal

capacity can be defined as the tax base of a locality, a state, or a nation as measured by some form of

economic income or wealth. Capacity can be measured using various methods. For example, a county’s fiscal

capacity might be measured by residents’ per capita property value or per capita income. At the state level,

fiscal capacity may be represented by state residents’ per capita income or the gross state product. As a

nation, we can examine fiscal capacity by comparing our gross domestic product (GDP) to that of other

nations. Depending on the criteria used—property, income, and/or GDP—widely varying levels of capacity may

result.

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It is helpful to think of capacity and effort as a two-axis construct (see Figure 6.1). On the vertical axis,

capacity ranges from low to high. On the horizontal axis, effort ranges from low to high. This yields four

quadrants within which various levels of funding education systems may fall. For example, government entities

may possess or have access to a great deal of capacity, yet choose not to fund education commensurate with

that capacity. On the other hand, localities may have moderate or low capacity but decide to put more effort

into funding education programs.

Obviously, not all localities within a state have the same fiscal capacity. Some localities are relatively

wealthy while others struggle to keep the lights on in the municipal building. Yet communities and policy

makers expect school districts to raise the achievement of students in all subgroups—affluent, middle-class,

low-income, minority, students with disabilities, and English language learners—to the same high state

standards. Financially struggling localities, however, cannot be expected to bring the same level of resources

to the table as wealthy localities do.

Chapter 5 explains that states must equalize for this variance in capacity among school districts by

providing greater financial resources to low-capacity localities and fewer state resources to high-capacity

systems. In other words, high-capacity systems must fund a greater share of education with local dollars.

Conversely, lower capacity systems are funded to a greater level with state funds to make up for their lack of

ability to raise funds locally.

As Figure 6.2 indicates, low-capacity systems pay some of the cost of education whereas high-capacity

systems pay most—but usually not all—of the cost. As a rule, the poorest locality will always pay something,

and the richest locality will always receive something. A state-developed formula determines the slope of the

diagonal line in Figure 6.2 and calculates what localities pay and what they receive.

Determining Fiscal Capacity

Initially, the idea of fiscal capacity and how state and federal governments equalize for capacity seems

relatively simple: low-capacity states and localities receive a greater share of funds from respective federal and

state treasuries to operate the schools to “level the playing field” for educational opportunity. The richer help

the poorer. As we know, however, sharing scarce resources is much more complex. Most localities use

property taxes as the primary source of school funding. As previously noted, the value of one’s home as

measured by the property tax may not be the best measure of capacity to fund schools—especially in an

economy when many mortgages are “under water,” with the homeowners owing more than the price for which

the house could sell. Today, income may be a more realistic measurement of wealth. Moreover, a combination

of measurements may be the best overall indicator of capacity.

With this in mind, several questions beg answers. What factors determine capacity? To what relative

level should both personal property and income be calculated to determine

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capacity? Furthermore, what role should commercial and industrial property value play in the overall

equalization equation? Should sales tax revenue be calculated in this formula? If so, what should be taxed,

and how should it be applied? Taxing groceries and medicines tends to have a regressive effect on poorer

people. To that end, should high-end foods and elective medicines be taxed and the rest untaxed?

Determining a working formula for fiscal capacity is not simple. Which economic and political factors come into

play that ultimately shape the algebraic slope of the equalization formula line? This is the stuff of equity court

cases.

Let’s consider two school district scenarios (Table 6.1).1 Both school districts have the same per capita

property value of $100,000. School District A, however, has all of its property wealth in residential property

value. School District B, on the other hand, has one-half of its property wealth in residential sites with the other

half evenly divided between commercial and industrial sites. Both school districts have the same per capita

income of $75,000. We have not addressed agricultural values here, although many localities have a great

deal of capacity in agricultural land values that further complicate matters.

Do both districts have the same capacity to fund schools? Unlike residential property owners,

commercial and industrial property owners can transfer their tax burden to other users through higher prices on

the goods and services they manufacture and sell. What do the higher prices of products have to do with local

capacity if the tax burden is shifted to the consumer from commercial or industrial property owners? Table 6.1

provides a simplified overview of several factors associated with school district funding to demonstrate the

complexity of computing capacity. The sales taxes generated by the commercial sites are not included, nor

have we indicated the number or diversity of the industrial sites. Are the localities and their economies in a

growth mode or in decline? Do the commercial and industrial sites bolster or depress residential property

values? In addition, the per capita income and property values are averages. Are there one or two very large,

wealthy businesses or homes with the rest of the properties at poverty levels? Do Bill Gates and Warren Buffett

live in the locality surrounded by low-income individuals? (Probably not, but imagine the town of mine workers

and a few mine owners.) Extreme factors, or outliers in the equation, tend to distort the mean, or per capita

data. All these concepts must be considered. As always, the devil is in the details.

Which school district is better able to fund schools? Initially, it would appear that School District B might

be the choice as its tax base is diversified. To make that determination, however, requires more data than is

provided.2 It is obvious that not all school districts have the same ability to fund education to state standards.

To have each district—poor and wealthy—fund education on its own would require very little effort for the

wealthiest communities and an almost impossible effort for the poorest (see Chapter 7). This is why states are

required to equalize funding based on the districts’ ability or capacity to fund those services. Localities have

varying levels of capacity, as do states and nations. Many factors must be considered in determining ability to

fund schools.

To make legitimate comparisons, we can examine the property and/or income per capita on a per pupil

basis. Table 6.2 shows per capita income, per capita property values, and a mix of both measures of wealth

supporting each student in the two districts. For this calculation, we need to know the number of residents in

each system. To make the computation, it is necessary to multiply the number of residents by the per capita

income, per capita property value, and some mix of the two. In this case, we will use property and income.

Without

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doing the calculations, it would be difficult to “eyeball” which district had greater capacity.

Once the calculations are completed, it is easy to see the wealth behind students in each school

district. Using only PCI, School District B has $35,000 more fiscal capacity than District A. Using only PCPV,

the two districts have the same fiscal capacity of $200,000 of per capita property value for each student. Using

two measures PCI and PCPV may provide a better measure of wealth for the districts. In that case, School

District B comes out ahead with $35,000 greater capacity than School District A.

Local Fiscal Capacity Issues

Traditionally, a locality measured its fiscal capacity as a ratio of the district’s property valuation divided

by the number of pupils within the system. This provides a property value amount on a per pupil basis. On the

surface, this seems like a fair means of comparing local capacity. But, this calculation method lacks an

important education component—the students’ needs. A high-poverty school district will have greater

proportional needs than virtually any other school district. Students who come to school well fed and already

possessing basic literacy and numeracy skills do not have the same educational needs as those who come to

school hungry and without years of reading and arithmetic experiences at home.

In addition, all other factors being equal, a school district with 20% of its students identified as eligible to

receive special education services will have a greater need than the district

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with 10% of its students receiving special education services. Moreover, an isolated, rural school system has

different needs from those of an affluent, suburban district close to a bustling city’s cultural and intellectual

advantages. To have each district fund education independently based primarily on property wealth puts a far

greater burden on the poor than on the rich. Relying solely on local property values to fund education does not

meet the criterion of education as a state function. Nor does it ensure students’ educational equity.

Today, states have more sophisticated methods for determining capacity, and many states now include

the district’s and state’s income and sales tax measurements as a way to equalize assessments. State

constitutions and laws vary in how each state measures fiscal capacity.3

How school districts measure capacity is the hinge pin for determining how each state equalizes

education funding. For years, scholars have known that wide disparities existed in fiscal capacity within states,

and a single measurement of wealth (such as property) only exacerbated the problem. They know that taxation

needs to be equalized at the state level to accommodate variances in district capacity. In 1906, education

historian Ellwood Cubberley wrote, “any attempt at the equalization of opportunities for education, much less

any attempt at equalizing burdens, is clearly impossible under a system of exclusively local taxation.”4 How

states equalize these funds today is the fodder of state constitutional challenges and Supreme Court cases.

When discussing capacity, it also is important to consider the size of school districts and the number of

school districts within states. As Kern Alexander and Richard Salmon, two distinguished finance scholars and

researchers, note:5

Disparities in the fiscal capacity of school districts are generally much greater than the variation in

capacity among the states . . . . Even when all school districts are of reasonably adequate size, considerable

difference remains among the districts in their ability to finance educational programs. If no state aid were

provided in states, the low fiscal capacity districts would have to make many times the fiscal effort their high

capacity peers do to finance an adequate program of educational opportunity. The situation in the states that

maintain large numbers of very small school districts is, of course, much more serious, with the range often

exceeding 100 to 1.

In other words, it is easier for states to fund programs with large school districts than to fund them for

many small school districts. In Virginia, for example, small, rural, isolated Highland County has approximately

200 students. Fairfax County, one of the nation’s largest school districts, located outside the nation’s capital,

has approximately 188,000 students. The per capita tax base is much larger in Fairfax than in Highland.

Resources are more available, the schools have an efficiency of size, administrative costs are controlled by

economies of scale, and salaries, higher than the state average (although lower than the average county

income), provide Fairfax County with certain financial advantages over Highland County.

In general, larger school districts reach a point of efficiency. The cost of all services is spread out over a

larger student base, reducing per pupil costs. For example, a school with 400 students and another with 600

students may have the same number of administrators, secretaries, librarians, and nurses. But the larger

school may have four or five more teachers. If the cost of operating the school on a per-student basis is spread

out over all of the students, it is more cost-effective to run the school with 600 students than the one with 400

students.

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Larger districts have the ability to organize schools more efficiently than do smaller school districts.

When considering school district efficiency, it is wise to look at the number of students in each state and

the number of school districts in each state and compute the average number of students in each school

district. Remember that significant variance occurs in the size of the school districts—as in Highland and

Fairfax Counties, Virginia. Table 6.3 shows the number of school districts per state (latest data available) and

the average number of pupils per district.6

You may notice that Hawaii has only one school district. It is a state-run system of education—the only

one like it in the U.S.7 Florida and Maryland have relatively large school districts with 40,989 and 36,650

students per district, respectively. On the other hand, Vermont and Montana have the lowest average number

of pupils per district with 215 and 356, respectively. Consider the building costs, the administrative overhead,

and the State Department of Education costs amortized over the small school districts compared to those of

larger districts. The larger school districts are more efficient because the per pupil expenses can be lower,

spread out over a larger group of students.

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State Fiscal Capacity Issues

Just as localities differ in their ability to raise funds for services, states also vary in their capacity. For example,

the pictures of desperate family poverty in the Deep South that President Lyndon Johnson showed the nation

in the mid-1960s bore no resemblance to anything that most New England families had seen in their states. In

truth, most middle- and upper-class Americans could not relate to that type of abject deprivation. If that level of

indigence existed in homes, what conditions existed in the schools these children attended? What resources

did their teachers have? How much money was the PTA able to raise for these schools?

Variance exists in states’ fiscal capacity. Just as the late 19th century measured capacity as property

values, states today can calculate per capita property values. Likewise, it is possible to calculate per capita

income, and also to adjust for cost of living standards across states. Each piece of information provides

another part of the puzzle in determining state capacity. And using multiple variables in determining capacity

gives a better indication of wealth than using a single measure.

Variance also exists in how state capacity is measured. Some states measure capacity on a capita or

total population basis. Other states calculate capacity according to how many

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students are enrolled in public schools. In the first instance, it is argued that government services must be

provided for all the population—not just for public school students. In the second instance, it is argued that for

education purposes, the number of students enrolled in public schools should be the measure of capacity.

Obviously, this can be a contentious point. State population demographics vary. For example, some states are

retirement havens, and may have a relatively low ratio of students to the overall population. Generally, the

preferred method for computing capacity uses the number of public school students as the denominator.

Table 6.4 shows the 2017 per capita personal income for individuals on a state-wide basis (latest data

available). Over time, the rankings may shift. One cautionary note in using income indicators: per capita

income can change rapidly, as we have seen in the Great Recession. If a statewide economic downturn occurs

and a large portion of the population becomes unemployed, income will decrease quickly and does not reflect

the overall capacity picture accurately.

The relationship between personal income and state capacity differs by state because costs of living

vary. It is more expensive to live in New York City than to live in upstate New York, and it is more expensive to

live in San Francisco than in Bakersfield. Examining per capita income (PCI) adjusted for a cost of living index

helps determine how much personal income is worth in a particular geographic context. Table 6.4 shows each

state’s Regional Price Parities (a type of cost of living index) for 2016 (also latest data available). The United

States average is 100. Hawaii has the highest index at 118.4 while Mississippi has the lowest index at 86.4.

This means that prices—and the cost of living—are 18.4% more expensive in Hawaii than the U.S. average

and 13.6% less expensive in Mississippi than the U.S. average.

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This information can tell us a lot about a state’s capacity. For example, South Dakota has a relatively

moderate per capita personal income (ranked at 23) but it also has a low cost of living (ranked at 46). Hawaii,

on the other hand, has a relatively moderate per capita personal income (ranked at 18) while ranking first in

cost of living. The cost of living has an impact on a state’s ability to fund government services. Based on that

information, one might assume that South Dakota with a higher income ranking and a lower cost of living might

be able to spend a relatively higher amount on education. One might also assume that Hawaii with the highest

cost of living and a moderate income ranking might be pressed to spend a great deal on education. That is not

always the case as seen in Table 6.5.

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While many states are close in per capita income and per pupil spending—Wyoming ranks 9th on both

measures and Georgia ranks 41st in income and 40th in per pupil spending—some glaring disparities are

evident. Washington, DC ranks first in per capita income at $76,986 but ranks 13th in per pupil spending.

Looking another way shows West Virginia, ranked 50th in income, but 16th in spending. Additionally, Vermont

ranks 20th in income and first in spending. Considering the level of wealth and the level of spending on

education may show where states place their priorities.8

Measuring fiscal capacity is not a simple process. Local and state politicians may attempt to measure

wealth in simple terms, but knowledgeable citizens, educators, and administrators appreciate the issue’s

complexity.

National Fiscal Capacity Issues

Certain national and international issues are of concern to education finance. Addressing national fiscal

capacity in detail is beyond the scope and responsibilities of most U.S. educators, but we will provide a brief

overview here. Just as states and localities have difficulty measuring capacity, so do nations.

This problem is seen in the various measurements that pass in and out of favor to measure wealth and

productivity. Many ways exist to compute a nation’s wealth. Gross National Product (GNP) includes the total

economic value of all the goods and services a country produces during a given year. Gross Domestic Product

(GDP) includes the total output a country produces, including either public or private factors, regardless of

where production occurs, within a given year. GDP is now a more favored indicator with economists than GNP.

That said, GDP is a fair proxy for a nation’s capacity. Natural resources were once considered the

primary focus for developing wealth or capacity. We now know that human capital development as a resource

plays an integral role in how nations advance. In The Work of Nations,9 Robert Reich, a political economist

and professor of public policy at the University of California at Berkeley, sees a future in which national

resources include the workforce’s skills and developed human capital. Consider Reich’s comments in light of

two countries—Japan, a natural resource-poor country and the United States, a country rich in natural

resources. Before the Pacific Rim stock market collapse (1997), Japan’s economy was touted in journals,

books, and newspapers because its per capita GNP had overtaken that of the United States.10 Yet Japan has

virtually no natural resources of its own, and it must import almost everything used in the manufacturing

process.

By comparison, the United States is the world’s most powerful country with resources that other nations

envy. We have an educated workforce with a high level of productivity. Our system of higher education is

superior to that in any other country, and our military resources are unequalled. Obviously, a country’s natural

resources must now include how it develops its workforce’s skills and human capital—a fact that should not go

unnoticed by educators since we have the responsibility and honor of preparing that future generation’s

workforce!

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In spite of these strengths, the United States is not the wealthiest nation on a per capita basis. Table

6.6 shows the rankings for the 30 countries with the highest per capita GDP based on Purchasing Power Parity

(PPP). PPP equalizes the purchasing power of different currencies among countries usually converting to U.S.

dollars. For example, The Economist uses the “Big Mac” index to show how PPP works.11 Basically, the index

controls for various exchange rates and cost of living formula to determine (and “equalize”) what the price of a

“Big Mac” would be in any two countries around the world converted to U.S. dollars. The range in per capita

GDP based on PPP for the top 30 countries is $81,697.

By comparison, Table 6.7 lists the world’s ten poorest countries with a per capita GDP of less than

$2,000 or less per year. Clearly, the disparity among nations’ wealth is very large. These poorest countries face

devastating problems including disease, starvation, and civil war. Although survival needs trump education

needs, most of these developing countries realize the potential for education to elevate physical and economic

circumstances and cure the ills they face. One must wonder what will happen to the world economy as the

countries that develop their human capital advance while other countries go without the resources even to bury

their dead.

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Many countries respect the United States for our high-quality education system—both P-12 public

education and higher education. They realize that education develops human capital, and that expenditures for

schools are an investment in their country’s future. At the same time, many believe that unless the United

States and its 50 state education systems use their substantial fiscal capacity to invest in improving public

education, other countries will surpass us in many wealth measures on a per capita basis.

FISCAL EFFORT

The first part of this chapter introduced the idea of fiscal capacity—the resources available to fund public

services. This second part deals with the complementary concept—fiscal effort, the extent of public

commitment to use its resources to fund the services and programs it deems essential to community

well-being. The companion website for this text has an Excel spreadsheet resource that displays all the

counties in Texas with a wealth of information that will help you better understand capacity and effort. Figure

6.1 illustrates how these two concepts fit together.

More precisely, fiscal effort measures how much a locality, state, or nation spends of its resources in

relation to capacity—or its ability to pay.12 Measuring capacity is a good place to start examining the wealth of

a nation, state, or locality. The relative effort of that spending—the degree of exertion or fiscal struggle a

community experiences as it commits its resources for education—tells a much more robust story about what

people value.

Communities have varying levels of fiscal capacity and commit varying levels of fiscal effort to fund their

public educational programs and facilities. For example, poorer school districts (low capacity) may spend a

greater share of their wealth on education (high effort) whereas more affluent school districts (high capacity)

may spend relatively little (low effort) to support their schools to achieve the same or higher levels of services

(and outcomes) for their children. For instance, Table 6.5 shows state per capita rankings of income and

education spending. West Virginia ranks 50th in per capita income (low capacity) and 16th in education

spending (a relatively higher level of effort compared with capacity). Knowing that, we can assume for now that

West Virginia exerts a high level of fiscal effort for education. Later in the chapter, we will explain how to

compute effort.

Localities, states, and nations pose an array of thorny questions to help determine their amount of fiscal

effort in relation to their wealth. For example: Is it right for the state to

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determine a minimum local effort that is required before a community is eligible to receive state funds? Can

and should states “cap” local contributions to education—in effect saying to the locality that if it levies additional

taxes, those monies must go back to the state to raise the “floor” of educational opportunity for other localities’

children? Is it right for the federal government to establish high academic standards that all students must meet

regardless of a locality’s capacity or effort—even if the state provides insufficient funding for education? These

are complex questions whose answers bear heavily on the educational quality a locality’s and state’s students

will receive.

Factors Influencing Effort

Many factors influence the fiscal effort provided to support public education. First, the public’s interest and

attitude about their public schools sway their attempt to fund education services. In many areas, traditional

attitudes about public education affect this view. Historically, some states have always valued public education

and supported their local schools more than others did. In Chapter 2, we suggested that you examine your

state’s historic posture regarding support for public education, considering what Cubberley called “school

conditions”—good, mixed, no action, and pauper/parochial. You may find that tradition has a great deal to do

with how much your state spends on public education today.

People’s opinions about taxes in general introduce another factor associated with fiscal effort to support

public schools. Since the Reagan years, many have viewed taxes as bad and elected politicians to office on

platforms of tax reduction and increased—or at least unreduced—public services. The public at large believes

they pay too many tax dollars for the services they receive, and they resent paying taxes for services that they

do not receive (but that others do receive). Typically, people tend to vote with their pocketbooks instead of their

intellects and don’t think long term about the consequences for themselves and others of reduced public

education services for the next generation of neighbors, taxpayers, and citizens.

However, when politicians cut other public services in order to maintain public schools, the competition

for available public dollars intensifies. If every budget except education has its funding reduced, hostile feelings

among various departments and agencies may result. The cost in political support from those hurt often leaves

school boards and superintendents vulnerable to personnel changes. This can be the unkindest cut of all.

Citizens’ perceptions and emotions about their schools also influence fiscal effort. Frequently, educators

are not very adept at public relations and marketing. Consider this scenario: the family sits at home on a

workday evening. The phone rings, and little Johnny answers. He listens intently, covers the mouthpiece, and

says, “Mommy, it’s my teacher. It’s for you.”

Most likely, Mother’s first question to her son is, “What did you do wrong in school today?” Why isn’t her

response, “Oh, Johnny, your teacher must be calling to tell me another

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wonderful thing you did today?” In fact, the overwhelming majority of educators’ phone calls to students’ homes

deliver bad news. Why don’t educators routinely call parents with good news about their child’s behavior or

achievement? Without a doubt, the culprit is time. Most teachers and principals have more than their share to

do in a very few hours. It is understandable, therefore, that parents associate communications from school with

negative feelings. Given this reality, how can educators expect parents to enthusiastically support requests for

school funding increases at budget time?13

The percentage of the population with children enrolled in public (rather than in private) schools also

affects community support for education. Again, this may reflect local tradition or the people’s sentiments about

their public schools. Where a large portion of the community pays for private school tuition for their children,

the locality is less likely to garner support for large tax increases to adequately fund the public schools.

Likewise, the percentage of the population with children or grandchildren attending the local public

schools also influences support for public education. It is easier for parents and grandparents to back budget

increases if they see how it directly benefits their families. By contrast, those without personal connections to

public schools will feel less utility in supporting school budget increases.

Municipal and school system leadership also shapes popular backing for education programs. When

the community trusts and supports its leadership and when the leadership visibly endorses public education

goals, the community gets a clear message advancing education spending. On the flip side, when municipal

and school chiefs exhibit mutual mistrust, the public receives a different clear message—avoid support until

both leadership positions and the situation change.

Of course, other elements sway public backing for education, too. It is difficult to pin down how much

one factor contributes to the variance in spending. According to Alexander and Salmon (1995), “No one has

been able to determine, up to this time, the effects of any one factor, or the combination of factors such as

these, upon the fiscal effort made by any state to support its public schools.”14 This dilemma remains today.

Educators can and must do a better job of influencing fiscal effort for public education by cooperating

with other agencies and earning the public’s trust and confidence. To advocate adequate education funding

successfully and to collaborate effectively with other agencies, educational leaders must know the facts about

financing education and their communities.

Computing Fiscal Effort

How do we compute effort? The concept and the computation are rather simple. Effort is best described as a

ratio. In its simplest form, effort can be described as the ratio of school spending (expenditures) to the overall

tax base, or some measure or measures of capacity (wealth). We always use the term relative fiscal effort

because a single measure of fiscal effort tells us almost nothing. Effort is always used to compare two or more

entities. The formula looks like this:

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E stands for effort, R stands for revenue (per pupil spending), and TB stands for the tax base (some

measure of wealth—per capita income, per capita property value, per capita gross state or domestic product,

and the like).

Effort must be considered as a ratio. Here’s why: without comparing the revenue provided for education

against the available tax base to fund education, only the tax dollars contributed would be examined. Even if

those dollars were based on a per pupil expenditure, wealthy districts—by spending just a few dollars more per

pupil—would always look like they were exerting more effort than any other school district because they would

present a larger budget. To understand effort more accurately, these dollars must be examined in light of the

locality’s capacity to fund education. We do that by using a ratio that accounts for the tax base available to fund

public services.

In addition, fiscal effort may be computed by examining the nations, states, or localities individually, not

collectively. Computing effort by summing the local, state, and national tax revenues can have the effect of

mixing apples, oranges, and nuts. It blurs the overall picture. One purpose of state funding is to equalize for

local disparities in ability to pay for education. A poor locality electing not to put many of their available tax

dollars into education can appear to be exerting greater fiscal effort if it includes funding received from the state

when computing fiscal effort. Adding the state funding to the local budget makes the locality seem to give more

money—a higher level of fiscal effort—to educate its children.

The same is true of localities having high capacity and electing not to put much fiscal effort into

education. Computing effort including state and federal tax dollars can make this system look to be exerting

greater effort than it really is. Therefore, adding state funding to local funding to compute the effort ratio may be

a flawed practice in some instances. At the most basic level, each unit of funding should be computed

individually—local, state, and federal. Aggregating state and local funding to demonstrate state effort can be

done, but it provides a less transparent—and more misleading—picture of effort.

Just as richer states providing the same level of fiscal support to education as poorer states will always

“look” better in terms of effort unless also considering capacity, the same is true when looking at how nations

fund education relative to their capacity. That is, it is important to consider national spending relative to some

measure—in this case GDP.

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Relative Fiscal Effort

Fiscal effort is relative. Obtaining one effort index really tells us nothing. Dollar amounts have more meaning

when placed in a relevant context. How much of a locality’s wealth is spent on education without a valid

comparison to another locality provides only one reference point. It must be in comparison with other localities,

states, or nations. This will make much more sense as you compare the two school systems in the next section

and when you complete the case study at the end of the chapter.

Since states vary broadly in their ability to raise revenues, comparing states on fiscal effort can be

misleading. Some states—including Alaska, North Dakota, and Wyoming—derive large revenues from

severance taxes from oil and gas. Other states—such as Delaware and New York—have a large capacity for

revenue from businesses headquartered within their states. On the other hand, many rural states have limited

numbers of businesses headquartered within their boundaries. Using only one criterion to measure wealth,

therefore, will leave out other essential variables that could be considered. As a result, fiscal effort rankings

may change year-to-year as education spending and wealth measures change.

Local Effort

Localities may receive education funding from a variety of sources. Table 6.8 provides capacity information for

two hypothetical school districts. Admittedly, this is a simplification, but it will help clarify some of the

complexities and concepts involved when defining relative fiscal effort. When computing effort, we use the

formula provided earlier. Note that the effort index computed in this manner will never be greater than 1.0

because that would mean more than 100% of the available tax base was being spent on education, leaving no

room for other agency spending.

The first scenario (Table 6.9) looks at effort funded solely by a portion of the local real estate tax base.

Elm School District has $75,000 total per capita property value available (capacity) and spends $12,000 per

pupil (effort). Oak School District has a total per capita property value of $100,000 and spends $15,000 per

pupil. Using the formula for computing

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effort, we find that Elm School District exerts greater effort than does Oak School District. This disparity exists

because Oak School District has greater property value than Elm School District yet spends less of its wealth

to educate each student.

As mentioned in Chapter 5, real estate taxes, especially for a community’s homeowners, may not be

the fairest way to fund education. When we examine effort for these two school districts in terms of per capita

income, a different view emerges (Table 6.10). Here Elm School District (0.16) has a lower effort ratio than

does Oak School District (0.25). In terms of income available as a tax base, Elm School District has greater

capacity than Oak School District, but by this measure, exerts less fiscal effort than does Oak School District.

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Wealth is a measure of many variables. Many states use a composite index of real estate, income, and

sometime sales taxes on a proportional basis to calculate a locality’s ability to fund education. To look at

capacity with only one measure—real estate value or income—does not provide an accurate measure of a

locality’s capacity.

Now let’s measure wealth as a ratio of 50% income tax and 50% property tax (Table 6.11). In this case,

Elm School District has an effort index of 0.08, and Oak School District has an index of 0.09375, the greater

number indicating the greater effort. With this measure, we are using more data to determine the effort index of

the two districts, leading to a more accurate picture of their effort. Notice that the relative effort values using the

two measures are less than what they were for using the single measure. That is because the denominator has

increased.

If we now include another factor, sales taxes collected on a per capita basis in each locality, we can

adjust the values for each of the three capacity measures. For this example, the formula becomes 50%

property taxes, 40% income taxes, and 10% sales taxes (Table 6.12). Using these three measures, Elm School

District’s effort ratio is 0.1771, showing less effort than Oak School District, with an index of 0.2025.

Using multiple criteria provides a more accurate statistical measure for wealth and enhanced

comparisons of fiscal effort, although measuring these criteria can become quite complex. In the case of Elm

and Oak School Districts, the only time Elm exerted greater fiscal effort than Oak was when the per capita

property value was used as a measure of wealth. The other three models showed Oak exerting greater fiscal

effort. In the end, each state legislature determines how the state will measure wealth and apportion that

wealth to the localities. Selecting the correct variables and weighting them appropriately bring personal and

local values and related political agendas into the discussion.

When a locality gives heavier weighting to property values as the predominant measure of wealth, the

cash flow to the locality remains relatively stable over time. Property values tend to increase over the years

except in blighted areas or when housing bubbles burst and recessions ensue. As compared with other

indicators, using property values as a measure of wealth ensures relatively constant tax revenue to the locality.

By comparison, localities that use income as a primary measure of wealth tend to find the cash flow

more erratic year to year. In strong economies, employed people get raises and bonuses, and the revenue

from income increases rather rapidly. When the economy eventually turns down (economies always run in

cycles) and salaries decrease or jobs lost, income tax revenues tend to drop quickly. To a lesser extent, the

same can be said for sales tax revenue. Spending for items tends to slow when the economy slows, reducing

sales tax revenue to the state and the locality.

As we have seen since the 2007–09 economic downturn, erratic revenue swings from the tax base make

municipal planning difficult. Schools continue to need teachers, supplies,

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utilities, technology, buses, and other resources. Personnel costs cannot increase and decrease with every

slight economic turn. State legislatures plan for this variable revenue stream so that monies coming into the

state treasury tend to be stable rather than unpredictable.

State Effort

State effort can be calculated in the same basic way we calculated the hypothetical levels for Elm and Oak

School Districts in the previous section. The formula for determining effort by dividing the revenue or

expenditures by the tax base to obtain a ratio that equalizes for capacity is still valid at the state level. All that

remains is to determine the tax base structure to use.

Fiscal effort can be computed at the state level in different ways. Because dollar amounts have more

meaning when put into context, Table 6.13 compares the 50 states and the District of Columbia in the relative

effort each exerts for education. In this example, fiscal effort is defined as the ratio of the states’ per pupil

expenditures divided by the state’s per capita gross domestic product.

A word of caution: comparing states on fiscal effort is inherently misleading because states vary broadly

in their ability to raise revenues. In Table 6.13, we used the measure of wealth as gross state product. As

discussed earlier, some states gain significant revenues from severance taxes on raw materials whereas other

states’ large capacity comes from business revenues from corporations headquartered in their states. Other

states, such as Nevada and New Jersey, obtain large revenues from casino gambling. Consequently, the state

rankings may change each year as education spending and the wealth measures change. Nonetheless, using

multiple measures of wealth offers a clearer picture of the available wealth or tax base.

In Table 6.13, the range in per pupil spending varies from $7,538 in Indiana to $25,286 in Vermont. The

effort indices range from a low of 0.1130 in North Dakota to a high of 0.5270 in Vermont. Of course, we could

use gross state product and per capita income in the denominator to enlarge the picture of wealth, but this

table gives the reader a basic understanding of how the math works. Whatever variables are chosen, they

should be used consistently to compare all the states on the same measure and show their relative effort.

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TABLE 6.13 State Per Pupil Spending, Per Capita Gross State Product, State Fiscal Effort and Rank, 2016 in

U.S. Dollars

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As seen in Table 6.13, gross state product (GSP) can be one measure of wealth. To ensure a stable

revenue stream, states typically measure relative wealth by per capita income (PCI) and per capita property

value (PCPV), and many include sales tax generated within a given locality. Sales tax revenue can be a

significant predictor of wealth—especially in tourist areas. As you remember from Chapter 5, there are other

revenue sources—such as corporate income taxes, gambling revenue, severance taxes, and sumptuary taxes.

By spreading the measures of wealth across various sources, states can protect themselves and their

essential services from drastic revenue swings, guaranteeing a stable funding stream to meet citizens’ basic

needs. Again, including multiple measures to calculate wealth in computing effort provides a more complete

picture of the wealth and effort relationship.

By computing the relative effort index, states’ fiscal effort for education can be determined on an

equalized basis and compared fairly. One can then determine which states place a high value on the next

generation’s education just as one can determine what different families value by examining their spending

priorities.

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The Great Recession threw a monkey wrench into state budgets. The Center on Budget and Policy Priorities

(2017) reported that 29 states provided less overall funding per student in the 2015 school year (latest data

available) than in the 2008 school year; and in 19 states local funding fell on a per student basis, compounding

the state cuts.15 Figure 6.3 shows the relative PK–12 funding level of 48 states and the percentage of change

in total state funding per student, inflation adjusted, for fiscal years 2008 to 2015.16 Arizona, for example, has

36.6% less per pupil funding in 2015 than it did in 2008. North Dakota, on the other hand, has increased

funding by 96.2%.

Education Week takes another tack to examine state fiscal effort. Their yearly report, Quality Counts 2018,

grades states on their financing of public education, using an extensive set of variables to calculate effort—the

percentage of total taxable resources spent on education. Table 6.14 shows the grade awarded to each state

on their education funding and the

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percentage of total taxable resources spent on education. Grades range from A-minus to D-minus and

percentages range from 5.4 to 2.3.

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Computing the effort index focuses attention on each state’s relative effort and enables comparisons on

a fair and equalized basis. One can then determine which states place a high value on the next generation’s

education just as one can determine what different families value by examining their spending priorities.

National Effort

The United States has tremendous fiscal capacity. In many ways, our country is the most powerful on the

planet. We hold undisputed influence with our military, technological, and economic strength, yet many

question how much we should spend on public education—the very vehicle that brought us to where we are

today. Some believe we spend too much on public education for the modest results we obtain. Others believe

our moderate spending does not reflect the national priority we should place on education as an investment in

the human capital needed for economic vitality and enlightened citizens. The general public is not certain what

to think.17 One fact remains relatively certain. Almost everyone would be happy to pay less in taxes. In reality,

people tend to vote with their pocketbooks.

Chapter 1 debunked the misconception about the U.S. spending more than any other country. Knowing

what you know now about fiscal effort, this point should be clear. First, in Purchase Parity Power (PPP) dollars,

the U.S. does not spend more than any other country on public education. Second, in terms of fiscal effort

measured as the percentage of GDP, our country spent less than the OECD average, just slightly higher than

Slovenia and slightly less than Canada, as Figure 6.4 shows.

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Figure 6.5 shows the change in education spending and the change in GDP for Organisation for

Economic Co-operation and Development (OECD) countries following the 2008 Great Recession and a 2014

recovery date. Note that this includes higher education spending as well as PK–12 education. The dark gray

bar references that change in education expenditures while the light gray bar references the change in GDP.

Notice that some countries’ GDP and their education expenditures have increased. Other countries’ GDP and

education expenditures have decreased. Interestingly, only four countries have seen an increase in GDP but a

decrease in education expenditures—Ireland, the United States, Lithuania, and Estonia. On the other hand,

two countries, Portugal and Finland, saw GDP decrease while education expenditures increased. These

patterns can certainly make for a lively discussion about national practices, priorities, and future educational

outcomes.

We have been examining the GDP of OECD countries which are relatively wealthy compared to much

of our world. In fact, the average per capita GDP of the five highest United Nations “Very High Human

Development” list of countries in PPP dollars is $63,513.18 A bit of perspective may be valuable. Consider the

poorest countries, labeled “Low Human Development” (LHD): the five lowest per capita GDP’s average in LHD

countries is $735.19 One must wonder how folks in the lowest rankings of LHD countries survive, much less

even provide high-quality basic levels of education.

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CONCLUSION

Determining the relationship between a locality (or state’s) actual wealth and its education spending—capacity

and relative effort levels—shows the value that government decision makers place on public education.

Developing consensus as to what measures of wealth should be used to determine the tax base is

complicated. An accurate measurement of the effort construct provides a true indicator of a locality or state’s

real capacity to fund total PK–12 spending in the United States as a percentage of GDP. From the human

capital perspective, it becomes obvious that education spending should be seen more as an investment than

an expenditure line in the budget.

CASE STUDY

You are the superintendent of Alpha County Schools, a large suburban school district that is highly competitive

with the neighboring district, Beta County Schools. Factors such as teacher salaries, school facilities,

technology, and per pupil spending highlight how the districts are vying for educational supremacy. Lately you

suspect that Beta County is exerting greater fiscal effort than your school district. You have shared this

awareness with the school board. They have asked you to support your claim at the next school board meeting

by presenting all the data possible regarding the two counties’ local fiscal effort. The school budgets for the

coming school year will be presented to the governing bodies in the next 4 months. If Beta County is investing

more of its resources in educating its children in their public schools, this could be a bargaining chip at budget

time.

Using the data in Table 6.15, explain the concepts of capacity and relative fiscal effort, presenting

various effort indices to explain the relative fiscal effort of both localities in funding education. Which of the tax

base factors will you recommend that the school board present when making its case for budget increases to

the locality’s governing body? Explain your rationale. You may present this in a memo or in a voice-over

PowerPoint presentation (depending on your instructor’s guidelines).

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CHAPTER QUESTIONS/ASSIGNMENTS

1. Define fiscal capacity. How does your state rank in terms of fiscal capacity to support schools?

2. Explain how an education system benefits from efficiency of size in its operation of schools.

3. Define fiscal effort. Explain why effort is difficult to operationalize.

4. Describe how to compute effort. Identify several additional factors that could be considered in computing

effort. Which of those factors would make your school district appear to have higher or lower effort ratios?

Explain your answer.

5. Identify the various factors that should be considered in computing effort that are not included in your state.

Explain your answer.

6. If the school board referenced in the Case Study presented to the governing body only selected data using

“favorable” tax base information to compute an effort index, how would you explain other data subsequently

discovered by the governing body that might lead to a different conclusion?

7. Using multiple measures as you examine the Texas state data on the companion website at

www.routledge.com/cw/owingskaplan which locality has the greatest capacity to fund its schools? Which

locality has the least capacity to fund its schools? Explain your answer.

NOTES

1 You would need to know how much residential property value was generated in each district and not the

per capita value. For example, there could be only 2,000 houses in one district and 20,000 in the other locality.

Even though the per capita values are similar, the revenue generated can vary greatly.

2 Even though the per capita property values and income are the same for both districts, School District B

could have several mansions worth tens of millions of dollars while the rest of them are more modest homes.

The distribution of income could fall along similar lines—several with multi-million dollar incomes and most

qualifying for a free or reduced-price lunch program.

3 As you remember from Chapter 3, education is a state function. As such, its method for equalizing the

funding of education services depends largely on each state’s constitution.

4 Cubberley, E. (1906). School funds and their apportionment. New York: Teachers College Press, p. 28.

5 Alexander, K., Salmon, R.G., & Alexander, E.K. (2015) Financing public schools: Theory, policy, and

practice. Abingdon, UK: Routledge, pp. 154–155.

6 One note of interest: since the second edition of this textbook (2013), the number of public school districts

has increased from 13,525 to 15,753 with the growth primarily reflecting the expanding number of public

charter school districts.

7 As a state-run system, Hawaii is an anomaly; its large size does not suggest efficiency.

8 This would be a good time to discuss your state’s level of wealth as measured by spending on education.

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9 Reich, R. (1991). The work of nations. Boston, MA: Alfred A. Knopf. Notice the similarities and differences

with Adam Smith’s The wealth of nations originally published in 1776.

10 In 1988, the Japanese per capita GNP exceeded that of the United States, $21,400 to $19,700 according

to the World Bank’s 1992 World Tables, published by Johns Hopkins University Press.

11 The Economist invented the Big Mac index in 1986 as a humorous guide to whether currencies are at

their “correct” level. For example, the average Big Mac in the USA in January 2018 cost $5.28 whereas it cost

$3.17 in China at market exchange rates. The “raw” Big Mac indices says the yuan was undervalued by 40%

at that time. See: The Economist (2018, January 17). The Big Mac index. Interactive currency-comparison tool.

Retrieved from www.economist.com/content/big-mac-index

12 We use the terms fiscal effort and effort interchangeably. Both refer to the degree of financial exertion a

community commits to funding their public schools by considering the relationship between the monies

available and the monies spent for education.

13 In our opinion, every educator could enhance the probability that the school budget requests gain public

support if they made at least one positive phone call home for every negative call.

14 Alexander, K. and Salmon, R. (1995). Public school finance. Boston, MA: Allyn & Bacon, p. 174.

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15 Leachman, M., Masterson, K., & Figueroa, E. (2017). A punishing decade for school funding. Washington,

DC: Center on Budget and Policy Priorities. Retrieved from

www.cbpp.org/research/state-budget-and-tax/a-punishing-decade-for-school-funding

16 Hawaii and Indiana were excluded because the data necessary to make a valid comparison were not

available.

17 The Phi Delta Kappa/Gallup polls on education show a somewhat confused public. The public views their

own schools as effective, but they are not sure about public schools in the rest of the country.

18 United Nations Development Programme (2016). Human development report 2016: Human development

for everyone. New York: Author, Table 10, pp. 234–237. Retrieved from

http://hdr.undp.org/sites/default/files/2016_human_development_report.pdf; the five countries with highest

GDPs in PPP$ among OECD members are: Luxembourg, Norway, Switzerland, United States, and Ireland.

19 The five “Low Human Development” countries with the lowest per capital GDP in PPP$ are: Niger, Liberia,

Congo, Burundi, and Central African Republic.

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Chapter 7: Equity, Adequacy, and Efficiency

FOCUS QUESTIONS

1 Explain the difference between equity and equality.

2 Discuss how the concept of adequacy affects school finance.

3 Describe how states equalize funding among their localities so children from the poorest areas have

access to at least the minimum level of state-mandated education services.

4 Identify the reasons why it cost more to educate students with disabilities, vocational students, or high

school students as compared to elementary students, and explain how educators can “cost out” these

differences.

5 Explain how funding adequacy is determined and discuss why very few educators would say that schools

are funded adequately to meet the current challenges.

6 Describe how inequitable funding of high-poverty schools influences its leadership, teaching

effectiveness, and student achievement.

7 Explain why using an economic lens to assess public schools can lead to inaccurate and misleading

conclusions.

This chapter examines three important and interrelated financial, political, and legal concepts in education

finance—equity, adequacy, and efficiency. Equity involves giving people what they need. Poorer communities

need greater financial and instructional support for education than do wealthier communities. Balancing these

diverse needs is a process known as equalization. Adequacy involves providing sufficient resources to

accomplish the job of educating our children. With high-stakes testing the mainstay of education reform,

equitable and adequate funding are necessary to satisfy this increased level of accountability. Efficiency

examines the cost of educational inputs and the quality of student outputs and the limitations of applying an

economic lens to understand public education. Recessionary times make equitable, adequate, and efficient

funding more important and more difficult to accomplish.

Chapter 6 discussed fiscal capacity and fiscal effort—how much capacity a locality, state, or nation has

and how much of that capacity is used for education. This chapter deals with the other side of that coin—how

schools apply funds to ensure equity, adequacy, and efficiency.

DO WE WANT EQUALITY OR EQUITY IN FUNDING?

No one doubts that before Brown v. Board of Education, funding for minorities was unequal, inequitable, and

inadequate, but what do those terms really mean? Equity should not be confused with equality. Equality

involves treating everyone the same. Equity involves giving people the treatment they need. Our nation holds

the idea of equality sacred—and rightfully so. Equal treatment under the law and equality of educational

opportunity are revered ideals. The naive view of equality as the governing principle for school spending would

give everyone the same level of funding. Superficially, this sounds rather reasonable. When considering the

issue more deeply, however, it becomes clear that equality cannot be the sole principle to govern education

finance. Treating everyone equally is not education’s goal. Instead, we strive for various types of equity and

adequacy in funding—giving localities sufficient resources to educate all its students to high, rigorous state

standards.

Here’s why. No one would deny that it costs more to staff a special education classroom than a general

education classroom. A special education classroom tends to have fewer students, more teachers per student,

and occasionally extra resources (therapists, aides, or equipment) to facilitate learning. Inherent inequities

exist within school districts, schools, and classrooms. Educational leaders must allow for those cost

differentials. A medical example helps clarify further. It costs more to provide medical care for a cancer patient

than a healthy person who only needs an annual flu shot. No one would expect both patients’ bills to be the

same. So it is with education. Some of our clients’ needs cost more to “treat” than others. That is why equality

cannot be the sole governing principle of school finance.

Consider funding for two hypothetical school systems. The first is an urban school system with 25% of

its students identified as eligible to receive special education services, over 50% of the student body reading

more than 2 years below grade level, and 90% of the students eligible for free or reduced-price lunch. The

second is a suburban school system with 99% of its students reading on or above grade level, 2% identified as

eligible to receive special education services, and less than 1% eligible for free or reduced-price lunch. The

first school system needs more resources than the second for students to successfully meet today’s

high-stakes educational challenges. For both to be funded equally, at some arbitrary level, is inherently

inequitable because their needs are so different. The school system with greater needs incurs greater

costs—providing what our “clients” need to reach the same high goal.

Examining the national school finance research over the last 25 years reveals some interesting equity

trends. One historic 50-state study showed that between 1970 and 1975, spending disparities among states

increased.1 This period became a time of intense school finance reform. Later, a 1997 U.S. General

Accounting Office study found substantial improvements in equity over time.2 The most recent long-term study

of school finance reform effects shows promising outcomes on educational achievement and eventual labor

market success: school finance reforms that increase spending for children from low-income families yield

significant increases in educational attainment, in eventual wages and family income, and in reductions in the

annual incidence of adult poverty.3 The study found smaller effects for children from “non-poor” families.

Spending for reduced student–teacher ratios, increased teacher salaries, and longer school years were

associated with these positive outcomes. The authors conclude:

A suggestive benefit–cost analysis reveals that investments in school spending are worthwhile. Increasing

spending by 10% for all school-age years increased wages by 7.7%. Someone born in 1975 would

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start school around 1980 when average per pupil spending was $5,459 in 2013 dollars. A 10% increase for 12 years

starting in 1980 is equal to $4,850 in present value (assuming a 6% discount rate). The median worker in 2013 earned

$28,031, so a 7.2% increase in earning for such a worker between ages 25 and 60 is worth just over $10,000 in present

value. This implies a benefit–cost ratio of about 3 and an internal rate of return of roughly 10%. . . . In sum, the estimated

benefits to increased school spending are large enough to justify the increased spending under the most reasonable

benefit–cost calculations.

(pp. 212–213)

School finance must be concerned with equity—providing what students need—as well as with equality.

While the concept of equity is simple, measuring this need is complicated and requires sophisticated statistical

procedures. Equity measurement has also prompted legal challenges to many states’ financing formulae. We

examine equity issues carefully because the concept has an important instructional impact for students’

learning.

Horizontal Equity

Education finance measures revolve around two fundamental equity issues: horizontal and vertical equity.4

Horizontal equity states that students who are alike should receive equal shares of funding.5 Horizontal equity

is measured by calculating the dispersion, or inequality, in the distribution of funds. When no inequality in

funding occurs, perfect horizontal equity exists. Horizontal equity occurs when schools receive equal funding

levels in areas including per pupil expenditures, student–teacher ratios, and equal teacher resources across

various measures. Again, this concept applies when children or schools are considered to be alike.

In measuring horizontal equity, broadly applied, we can compare large and similar subgroups of

students, such as all vocational students at the high school level, all full-day kindergarten students, or all

students in general education elementary classrooms. We would expect spending, or resource allocation, to be

substantially similar for each of these rather large subgroups. If the resource allocations vary substantially,

such as a half-day kindergarten program at one school and a full-day program at a similar school, the criteria

for horizontal equity have not been met.6

Vertical Equity

Vertical equity recognizes that students and schools are different, and that treating unequals requires

appropriate unequal treatment.7 In other words, a regular education student and a special needs student are

both expected to pass high-stakes tests under state and national accountability regimes. Since these students

have different learning needs, they should be treated appropriately, but differently.

Horizontal equity is relatively easy to quantify, but vertical equity choices are sometimes based on

personal or community values. Accordingly, “appropriate treatment” varies at the macro level, from one school

division to another, reflecting local priorities. What is deemed appropriate in one context should be consistent

across schools and districts, however. For example, at the micro level, two self-contained special education

classrooms of emotionally disturbed students should have the same relative level of resources allocated to

them. That is

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not to say that the two classrooms will be identical in funding or staffing, but funding differences should be

based on informed professional judgments of existing needs and available resources.

Allocating resources differently and appropriately depends on identifying legitimate factors based on the

characteristics of the students, the schools or school districts, and various programs. Student factors to

consider include the percentage of students eligible for free and reduced-price lunch, percentage of students

who are English language learners, percentage of students receiving special education services, or other valid

criteria. Most educators would agree that serving these students’ learning needs requires additional learning

resources and services.

Instances occur that turn vertical equity on its head, for example, when the neediest students receive

less funding and resources than the non-needy students. One case study captured the per pupil spending in

two high schools in the same district—the ones considered the “best” (highest achieving) and the “worst”

(lowest achieving) schools. For every dollar spent per pupil at the “best” high school, only 39.7 cents was spent

per pupil at the “worst” high school.8 Spending patterns show that significant financial disparities may still exist

within school districts.

Calculating Vertical Equity

As previously described, vertical equity means providing what people need—recognizing that students and

schools differ and that the treatment of unequals requires appropriate unequal treatment. Methods exist for

calculating the different costs of various programs. One method is the weighted pupil approach.

Weighted Pupil Approach

This widely used method for calculating vertical equity involves determining a base cost for various student

categories. Many people think it costs more to operate a high school than an elementary school. Likewise,

many believe special education is more expensive than general education. Both assumptions are correct. How

is the cost differential determined? Are the cost differentials sufficient to cover the additional resources needed

for the students involved in various programs? The answer to these two questions lies at the heart of weighting

costs for various students.

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History of Student Weightings

Twenty states provide financial help to localities for special education students through weights—financial

adjustments in which certain values count for more than others—to acknowledge the excess cost of programs

and services beyond regular education.9 For instance, if additional special education costs are 80% above the

general education funding, the special education costs would be 0.80; and the total student weight (including

general education) would be 1.80.10 Weights vary widely across states; and while they treat special education

students equitably, they don’t incentivize efficiency.

Determining appropriate costs to construct vertical equity and appropriate weights is a complex

process. The National Education Finance Project (NEFP) researched various education programs’ costs. In

one study, Richard Rossmiller examined best practices used with special education programs and applied

these data to establish the cost differentials for the various disability programs (shown in Table 7.1).11 Table

7.1’s terms reflect current (rather than 1971) special education categories.

From these weightings, many school districts established means for “costing out” related services.

Later, other states established weightings that more closely reflected their actual costs. Not all of these

calculations considered Rossmiller’s “best practices” method whose weightings show a means for calculating

the cost differences in educating individuals with varying needs.

States and districts vary in the method they use to determine “costing out” these services. How states

and localities determine these cost differentials leads them to discuss community values and priorities. They

must decide what constitutes an “adequate” educational program or what determines “adequate” spending.

These topics are discussed later in the chapter.

Fiscal Neutrality

A third issue associated with horizontal and vertical equity is fiscal neutrality.12 This concept can be

complicated in thought and measurement.13 For our purposes, fiscal neutrality is funding education based on

what an educated public wants to provide rather than funding based primarily on the wealth of the state or the

locality. Therefore, if the public wants X level of services for all students at the state level, the lack of School

District A’s fiscal capacity to pay for those services should not interfere with that level of services the district

provides.

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According to fiscal neutrality, equity is achieved when the taxpayers’ preferences for education—not the

locality or state’s fiscal capacity—determines the distribution of services. This is also known as taxpayer equity

or wealth neutrality. Fiscal neutrality is an indication that the funding system provided by the state allows school

districts to spend relatively equal amounts for a given tax rate, which includes state and local dollars. If this

measurement is the same across districts in a state, the formula provides for fiscal neutrality.

The question then becomes, how do states impart fiscal neutrality while also accommodating equity

issues? The answer is rather simple. As discussed earlier, one of taxes’ purposes is to redistribute wealth.

States need a method to calculate a lower services cost to those who can least afford to pay for them.

Likewise, states need a method that requires those who can afford to pay more to shoulder a greater share of

education’s expenses. That concept, known as fiscal equalization, will be discussed next.

Fiscal Equalization

Fiscal equalization can be seen as a continuum ranging from total equalization to no equalization. Each state

provides a method for equalizing school funding within its boundaries that lies somewhere on this continuum.

Because some states do this more effectively than others, more than two-thirds of the 50 states have faced

court challenges to their state funding formulae.14 Providing no fiscal equalization would be both immoral and

illegal.

School finance scholars refer to concepts known as absolute fiscal equalization and approximate fiscal

equalization. Absolute fiscal equalization is more a theoretical goal than a practical achievement. Although

hypothetically possible, absolute fiscal equalization is virtually impossible to achieve politically. Alexander and

Salmon provide the best operational definition when they say that absolute fiscal equalization has been

achieved when three conditions are met: (1) variance in fiscal position among local school districts has been

neutralized, (2) variance in fiscal effort among local school districts has been eliminated, and (3) variance in

educational needs due to incidence of clients has been accommodated.15 In other words, absolute fiscal

equalization becomes possible when local school districts have equal resources, show equal effort to fund their

schools, and spend what is necessary to educate students, including those with special learning needs.

Absolute fiscal equalization means that a locality has achieved fiscal neutrality and has successfully addressed

horizontal and vertical equity. Although this is certainly a goal to strive for, it is rarely, if ever, achieved in the

real world.

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Approximate fiscal equalization is a more practical concept. Alexander and Salmon determine that

approximate fiscal equalization has been met when (1) variance in fiscal position among local school districts

has been neutralized, (2) constrained variance in fiscal effort among local school districts is permitted, and (3)

variance in educational needs due to incidence of clients has been accommodated.16 In short, approximate

fiscal equalization becomes possible when local school districts have equal resources, schools have some

leeway in raising and spending funds for schools, and schools spend what is necessary to educate students,

including those with special learning needs.

The two definitions are alike except for the second condition—that of constrained or controlled

spending by local school districts. It is virtually impossible politically to prevent localities from spending what

they want on educating their children. Neutralized fiscal position and meeting clients’ educational needs are

required in spite of the local capacity. Thus, allowance for local spending makes the difference in approximate

and absolute fiscal equalization. It is also the reason fiscal equalization is theoretically—but not

practically—possible.

STATE AID GRANTS TO DISTRICTS

How do states provide for equalization? Each state’s constitution spells out how it proposes to fund education.

Basically, each state equalizes for local districts’ fiscal capacity through its method for funding localities. Each

state collects revenue and disperses it to districts, providing more funding to lower capacity districts and less

funding to higher capacity districts. This funding usually comes through various types of grants. Alexander and

Salmon view state aid as a continuum from inequity to equity and show the types of grants as they move along

the continuum from nonequalization, matching, flat, equalization, to full state funding.17

States vary in how they write equalization grants, and this affects the local districts’ equity levels. Some

states do not equalize as much as others. Depending on the state’s level of commitment to equalization and

the exact legislative language, the grants may be more or less equitable. Some states are more committed to

providing equity than others. The greater the variance between the state constitution’s language and the

equalization formula, the greater the likelihood that the formula will face a court challenge.

Consider this example. State A’s constitution speaks to providing an effective education level for all of

its citizens despite their level of wealth. State B’s constitution writes of providing an efficient education to its

citizens. Therefore, State A might provide a method for collecting revenue sufficient to provide a substantial

funding level for all localities. State B, on the other hand, might be a low-tax state, happy to provide only some

limited (efficient) education level to its poorest citizens. This disparity of goals and values is apparent in each

state’s constitutional language. State B’s grants, although referred to as equalization grants, may well be

nothing more than matching or flat grants.

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Nonequalization Grants

Nonequalization grants make no attempt to equalize funding for the capacity of local school districts. Although

these grants are not designed to be inequitable, they may have that impact. Many times, these grants provide

categorical aid to school divisions, allocating a constant dollar amount on a per pupil basis based on an

application process. Poorer school divisions may not have the personnel to write the grants enabling them to

qualify for the funds. Higher capacity systems may have the grant-writing personnel and obtain the funds. As a

result, this grant application process itself adversely affects equalizing funding.

Matching Grants

Matching grants are similar to nonequalization grants. They require poorer and wealthy school systems to

generate an equal per pupil funding as the grant amount. Since this requires the poorer school systems to

exert greater fiscal effort than is required of the wealthy systems, matching grants operate in a similar manner

to nonequalization grants.

Flat Grants

Flat grants provide a fixed amount of funding per pupil to each school district in the state. This funding is not

based on the locality’s fiscal capacity. Most states do not use flat grants as the primary vehicle for distributing

funds to localities because they provide low funding levels and increase inequities as it allows extra local

funding. Some states have constitutional requirements for state funding regardless of the locality’s capacity or

position to fund education. For example, California’s constitution requires $120 of state funding per pupil to

each locality—regardless of the locality’s fiscal position.18 Virginia’s constitution requires that regardless of the

locality’s capacity, the wealthiest localities must fund 80% of state standards (but may fund more). By

comparison, the poorest Virginia locality, Lee County, must fund 17% of the state standards while the state

funds 83% of state standards.19 In other words, California funds $120 per pupil regardless of capacity, and

Virginia funds 20% of the required standards for the wealthiest localities.

Table 7.2 displays the impact of flat grant equalization. Consider four localities. Each district taxes at

the rate of 10 mills (one-tenth of one cent, or $1 for $100 of property value). Each school district is awarded a

flat grant in the amount of $2,000. School District A has a property tax base of $5,000 per pupil that enables it

to raise $50 in revenue per pupil. The flat state grant of $2,000 brings the total spending in the locality with the

least capacity to $2,050 per pupil. In comparison, School District D, the highest capacity school district, has a

per pupil property value of $500,000, enabling it to exert the same effort of 10 mills and raise $5,000 per pupil.

Combined with the flat grant of $2,000, School District D has a total per pupil spending of $7,000.

Obviously, the flat grant enabled School District A to spend much more than it could have on its own. It

decreased the available local revenue disparity of $50 compared to $5,000 (1 to 100) to a spending disparity of

$2,050 to $7,000 (1 to 3.4). The flat grant only added the grant amount to the total available local revenue. In

that regard, the flat grant does little to

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equalize spending within a state. This also places a greater burden on the locality than on the state to provide

funding for education services.

Table 7.3 shows a model with increased state support and lower local support for education. Using the

same four school districts, we have increased the state’s flat grant to $4,000 and reduced the local effort from

10 mills to 5 mills. Although property values have not changed—a disparity of 1 to 10 still exists—the locality

has a lower tax burden, and the state has a greater burden to provide for education services. This reduces the

disparity in total per pupil spending from 3.4 to 1 ($7,000 to $2,050) to 1.6 to 1 ($6,500 to $4,025). By using

this method, a greater degree of equalization begins to take place. The next sections show that better methods

to equalize for education expenditures exist.

Equalization Grants

Many early education finance researchers laid the foundation for equalization grants.20 Equalization grants act

as modern-day Robin Hoods, so to speak. They provide greater state funding for localities with less capacity to

raise their own funds and provide less state funding for localities with greater capacity. For example, Virginia

has a funding model that assesses the wealth of a locality using per capita property value, per capita income,

and per capita sales tax revenue. Each measure of wealth is weighted—property at .5, income at .4,

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and sales tax at .1. Plugging these numbers into the equation yields a decimal value called the composite

index known as the Required Local Effort (RLE). Currently, those composite index values range from .1754

(high poverty) to .8000 (high wealth). That figure is the percentage of the state standards, or the foundation

level of programing, the locality must pay while the state will pay the remaining percentage. Localities are

permitted to fund above the state standards. Table 7.4 provides a simplified example of how this works to

equalize funding.

Foundation Programs

Foundation programs are a means of providing equalization grants to school systems. A foundation program

establishes some minimum level of state guaranteed per pupil or per teacher funding that localities must meet

with a combination of local and state funding to pay for a basic education program. By law, no district can fall

below this foundation level. Using mainly property and/or sales taxes, localities contribute to the state

guarantee from a uniform tax rate or the funding that would result from it. Nonetheless, even with similar tax

efforts, poor localities raise less funding and more affluent communities raise more because of variations in the

local property tax base. The state makes up that difference up to the state foundation level guarantee.

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Assume that the minimum foundation level is set at $10,000 per pupil. The local effort required will be

lower in low-capacity school districts and higher in high-capacity districts. Once the locality meets the

foundation level, districts can choose to supplement funding, called leeway funds, to achieve a higher level of

per pupil spending.

Table 7.5 provides an example of foundation program funding. Here, low-capacity School District A has

a local capacity to raise only $1,000 per pupil. The state has set a minimum foundation level of $10,000 per

pupil (admittedly a high level of spending). In this case, the state aid would make up the difference of $9,000 so

that District A can meet the state’s minimum foundation level. In this scenario, District A, an economically

modest community, does not have the fiscal capacity to generate any leeway funds to increase the total per

pupil spending.

At the other end of the spectrum are more affluent Districts D and E. District D has the local capacity to

raise $7,500 per pupil. In this case, the state would offer $2,500 to meet the foundation level. District D,

however, has the capacity to raise an additional $2,500 per pupil (local leeway funds), bringing their total per

pupil spending to $12,500. District E has the capacity to raise the full foundation level the state prescribes. It,

therefore, receives no state funding to meet the $10,000 per pupil foundation level. It raises an additional

$2,500 per pupil to bring spending to $12,500 per student.

The foundation program spending approach differs from flat grants because it has the effect of

equalizing funding for students on a much greater scale. In this scenario, School District E has ten times the

capacity of School District A, yet it spends only 25% more on a per pupil basis. Where the fiscal capacity

differential was initially 10 to 1, the spending differential due to the foundation formula is now only 1 to 1.25.

What does this mean for students? The poorest school district (A) now has the financial means to

provide the state-prescribed minimum education foundation level—regardless of its local capacity to fund

education services. This enables economically modest School District A to compete with highly affluent District

E in terms of educational programs, raising the floor level of services available to low-capacity school districts.

In other words, Juan and Sally can now both receive a high-quality education to state standards regardless of

which side of the proverbial tracks they live. Today, the majority of state governments (46 of 50) use some form

of a foundation program to fund local school programs.21

Unfortunately, problems with foundation funding exist. First, state legislators frequently see the word

minimum as the spending “limits” (the ceiling) rather than the “minimum level of funding” (the floor). Too often,

“minimum” becomes the funding target level, and funding does not advance beyond that. Second, localities

may elect not to add sufficient leeway funds (based either on values or on available resources) whereas higher

capacity systems may add substantially higher dollar amounts, exacerbating the per pupil spending disparity.

Third, state governments may be reluctant to set adequate levels of spending for a foundation program

because elected officials cannot agree on what is “adequate” or they want to reduce (or at least, not raise) local

tax levels.

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Full State Funding

The full state funding model assumes that education is a state function, and all the revenue raised for

education should come from state—not local—sources. Only Hawaii has truly a full state funding model.

Hawaii has a single, unified school system under the governor’s and state legislature’s financial control.

Hawaii’s funds come from the state general fund supported by state income, sales, and excise taxes. Other

states have been reluctant to adopt such a model.

The full state funding concept offers a paradox. Education, by constitutional definition, is a state

function. Leaving the education funding responsibility to localities gives opportunity for the rich to provide the

best services and the poor to provide the least. In theory, full state funding could be an effective method to

achieve fiscal equalization. In reality, however, the politics of influence and resources still play a major role in

education funding.

One healthy aspect of some local funding discretion for school districts within a state

exists—competition. When school districts compete for personnel with enhanced compensation, benefits, and

professional development programs, and when they vie for students with excellent instructional programs and

facilities, the entire community benefits. This competition may not exist in a full state funding model. Full state

funding has one unhealthy distinction: in Hawaii, it moves control of the system and access to it far from the

people it serves.

Funding Inequities in Low-Income, High-Minority Schools

Federal and state policies that stress educating all students to high academic standards assume that fiscal

resources will be available to meet this ambitious goal. But according to The Education Trust, in more than half

the states, school districts with the highest poverty rates receive about $1,000 less per student in state and

local funding than school districts with the lowest poverty rates.22 Likewise, a 2018 U.S. Commission on Civil

Rights Briefing Report to Congress found:

• Large funding inequities in our state public education systems deliver profoundly unequal education to

millions of American public school students.

• Most states do not allocate more funding to high-poverty school districts. More than 40% of Title I schools

spent less on personnel per pupil than non-Title I schools at the same grade level and in the same school

district.

• Low-income students and students of color are often assigned to low-quality school facilities that lack

equitable access to teachers, instructional materials, technology and technology support, critical facilities, and

physical maintenance, factors that can harm children’s health and ability to learn.

• Many U.S. students living in segregated, high-poverty neighborhoods do not have access to high-quality

schools simply because of where they live.

• American schooling’s reality does not match the American ideal of public education operating as a means

to equalize life opportunity, regardless of zip code, race, economic status, or life circumstance.

• Some scholars believe that concrete empirical evidence exists that funding is critical to positive student

outcomes.23

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Intra-district funding disparities are often attributed to teacher allocation. School district policies account

for much of this educator talent disparity. Because most large districts have uniform educator salary schedules

and union contracts that pay higher salaries for increased years of teaching or school leadership experience

and additional academic credentials, the salary differences between affluent and low-income, high-minority

schools stem from more experienced and educated teachers and principals sorting into schools with fewer

poor children. Schools with lower average teacher salaries tend to have the newcomers with the fewest years

of professional experience. Teacher transfers and resignations may aggravate these differences as the most

skilled educators are more likely to leave urban schools with many low-income students.24 A similar process is

true for principals.25

These salary discrepancies affect classroom learning and school climate in varied ways. Although

teacher experience does not guarantee teacher quality, researchers agree that teacher effectiveness increases

sharply during the first three years in the classroom and continues throughout a teacher’s career.26 As a

result, this continual educator churn leaves high-poverty schools without the quality leadership, faculty, or

academic climate needed to establish and support a culture for learning and a skilled, experienced, and caring

teacher cadre to positively affect student achievement. This inequitable assignment of teacher talent

contributes to high-poverty students achieving far below peers from low-poverty schools27 and a higher

percentage of 12th graders leaving high school without a diploma.28

Despite this unfair distribution of educational resources to low-income urban schools, educating

children growing up in poverty to common meaningful standards costs more than it does to bring more affluent

students to these standards.29 Bruce Baker, Rutgers professor, and colleagues have come up with a

fascinating model for computing the cost of educating children in poverty (along with other factors). They found

in some states, the funding required to reach the modest goal of current national average student achievement

outcomes for the highest poverty school districts falls as much as $14,000 to $16,000 per pupil below the

necessary spending level.30 Rubenstein and colleagues (2007) provide what is still a timely conclusion,

“Providing more equitable and adequate opportunities for high student performance across all schools may,

therefore, require a fundamental rethinking of how resources are allocated to schools and students, not simply

to school districts” (p. 543).31

ADEQUACY

Adequacy in funding means giving localities sufficient resources to educate all their students to high, rigorous

state standards. As a fiscal concept, adequacy is value driven; it is in the eye of the beholder. That is, people

define adequacy subjectively according to their own priorities and opinions. Attempts have been made to

quantify how much a state or school district needs to spend for its students, but the actual figure remains

ambiguous.

Allan Odden and Larry Picus, educational leadership professors, give us the best operational definition

of fiscal adequacy:

to teach the average student to state standards, and then to identify how much each district/school requires to

teach students with special needs—the learning disabled, those from poverty and thus educationally deficient

backgrounds, and those without English proficiency—to the same high and rigorous achievement standards.32

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Nonetheless, the answer to “What is adequate?” remains unclear.

As a result, this crucial yet vaguely defined concept has become the grist for court challenges since the

1990s. Over the last 30 years, legal disputes have shifted from equity—school funding disparities—to

adequacy issues, and fiscal adequacy may continue as the active focus of adjudication in coming years.

Between 1971 and 2010, 42 states faced legal challenges to their school funding systems; and in 28 states,

the courts overturned the existing system.33

For example, in 1985, the New Jersey Supreme Court in Abbott v. Burke found that the state funding

provided to poor children in low-wealth New Jersey communities was inadequate to meet state constitutional

standards.34 Through more than 20 decisions, the court mandated “parity” funding, that is, increased state aid

to the 28 “Abbott” districts (now 31) to bring per pupil revenues up to the per pupil expenditures of the state’s

successful districts. The court required such programs as full-day kindergarten, preschool for 3- and

4-year-olds, after-school and summer-school programs, as well as facility improvements. In 2009, the New

Jersey Supreme Court declared the state had fulfilled its constitutional duty by passing the New Jersey School

Funding Reform Act (NJSFRA) of 2008.35 Two years later, following Governor Chris Christie’s $1.1 billion in

budget cuts from the NJSFRA, the Education Law Center, on behalf of the Abbott Plaintiffs, filed a motion to

enforce the conditions of prior Abbott rulings. On May 24, 2011, the state supreme court ordered an additional

$500 million in funding for the 31 districts and full funding for the formula in 2011–12.36

Historically, in response to the case of Rose v. Council for Better Education, Kentucky’s school finance

model was the first in U.S. history to be designed with an “adequate” funding base for each school and school

district in the Commonwealth.37 Several follow-up studies since its implementation concluded that the new

funding formula had substantially improved equity within Kentucky.38

How does one determine an “adequate” level of funding? School finance experts use four basic

approaches: professional judgment or consensus, successful school district, economic cost function, and

state-of-the-art.

Professional Judgment or Consensus Approach

The professional judgment approach (or consensus approach) attempts to remedy the problems inherent in the

two previous methods. At least 13 states use the professional judgment approach.39 This method asks a

group of educational professionals to identify the components of a “prototype” school they believe would

enable the staff to teach students to some predetermined performance standard. The plan’s ingredients are

then “costed out” (number of professional and support staff, technology, instructional resources, and so forth)

and summed to determine a school’s adequate financial base. This base can then be adjusted for varying

demographics.

Using the resource cost model, Jay Chambers and Tom Parrish, two special education finance experts,

first developed this approach in 1983.40 Although it provides for varying demographics, the approaches

identified by the professional team provide little differentiation between the average school and one with a high

concentration of at-risk students. In spite of this drawback, the professional consensus approach is gaining

interest at the state level.

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Successful School District Approach

The successful school district approach seeks to determine how much schools that meet specific outcomes

currently spend. This method bypasses some of the complicated statistical procedures of the economic cost

function approach and identifies school districts that have successfully brought student performance to state

proficiency standards. This approach then sets the adequacy spending level to the weighted average of the

successful districts’ expenditure level.

Unfortunately, this approach omits outliers (atypical districts) from the equation. This excludes virtually

all large, urban areas, very wealthy and very poor districts, as well as small, rural systems. It also may

inaccurately represent the actual costs of delivering adequate services in these atypical districts.

What have we learned from the successful school district model? After excluding the atypical districts,

those districts identified as successful are generally average size, nonurban, with little student diversity, and

that tend to spend less than the state average. Ironically, the demographics of a “successful” school district

tend to distort the overall picture about what it means to be a successful school or school district. By omitting

schools that must effectively address the real-world challenges of educating urban, rural, and high-poverty

students, the formula artificially lowers the costs for achieving success.

Closely examining the successful school district model raises more questions about the validity of its

use. This method and the cost function approach link educational spending levels with student performance

levels, but they do not indicate what instructional strategies schools should use or how the funds should be

distributed at the school level.

Economic Cost Function Approach

In a nutshell, economic cost function tries to answer how much money per pupil a given school district needs to

produce a certain level of student performance. Here, statistical modeling determines the relationship between

a school district’s resources and the outcomes produced while controlling for factors that are inside or outside

local control. Those factors include economies of scale, prevailing wages, and students’ specific needs.

Computer simulations can estimate the cost of achieving selected student outcomes. Businesses frequently

use this complex statistical approach which relies on econometric techniques—cost functions—to estimate an

adequate level of resources to achieve desired outcomes. This model for

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determining fiscal adequacy reflects personal and community values. Some group must decide how much a

community is willing to spend so that some or all students can reach a certain achievement level.

What does this approach tell us? For the most part, it quantifies what we may have already suspected.

Some research has shown that adequate spending levels are close to the median spending level in the state if

the researchers selected the average student proficiency levels.41 Yet as we have discussed, student needs

and per pupil spending vary greatly across the country for each state and school district, and average has

many levels.

State-of-the-Art Approach

The state-of-the-art approach takes the best of all the other methods and combines them into a new model.

This approach selects research findings on student achievement frequently seen in high-achieving schools,

identifies all the components needed for those research-identified teaching and learning strategies, determines

a cost basis for each of the strategies, and then decides what an adequate spending base for the school

should be. This model makes the decision at the school level; it does not represent the school district average.

The approach draws on research findings that link several instructional practices to increased student

performance, includes some of the best thinking and data in education, and provides a funding level that allows

the school to use schoolwide strategies that state-of-the-art researchers and practitioners affirm are most

effective.

New Jersey has used the state-of-the-art approach in response to its ongoing state supreme court

challenge to its public education finance system. The 1998 state supreme court decision, Abbott v. Burke,

found that the state’s revised funding formula based on the state-of-the-art approach provided adequate

funding because it allowed sufficient monies for schools to adopt and finance the most expensive

comprehensive school designs.42

The fiscal adequacy issue is a dominant force in school finance and will continue to play a role in future

court challenges. The issues of equity and adequacy are two sides of one coin. One side asks if we are

treating children fairly. The other side asks if we are doing enough.

ARE PUBLIC SCHOOLS “INEFFICIENT”?

Public education is a $620 billion a year enterprise. Thus, it is no surprise that economists find schooling an

area of interest. But when comparing public organizations such as school

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districts and schools with private business and industry, economists contend that public schools are

“economically inefficient organizations.” Education privatizers tout this alleged “inefficiency” as a strategy to

encourage competition through charter schools, vouchers, and other parental choice programs.43

Coming at the same time as public school critics decry decades of increased funding despite

supposedly declining or static education outcomes44 (an assertion that has been contested),45 and tight state

budgets that tell public schools to “do more with less,”46 this charge deserves closer scrutiny. Understanding

budget maximizing theory, Baumol’s cost disease theory, and the limitations of applying an economist’s lens to

public school finance will help educational leaders better understand and thoughtfully challenge the distortions

this perspective offers.

An Economic Perspective on School Efficiency

To economists, the output of the educational process—namely, students’ achievement—is related directly to a

series of inputs. These inputs include the schools’ characteristics (including student demographics) and the

types of resources given to schools. These include real classroom resources (teacher education pre- and

in-service, teacher experience, teacher–pupil ratios, curricula and instructional materials); financial resources

(expenditures per pupil and educators’ salaries); and other resources (specific teacher characteristics and

skills, administrative costs, and facilities). Family socioeconomic status and community variables are also

essential educational inputs. All these factors have interactive and cumulative effects on student learning.

Realistically, public policy can affect the school-based input factors but not the personal or home-based input

factors. Outputs can be measured by proxies for students’ learning including standardized achievement test

scores, school attendance rates, and high school dropout and graduation rates. Economists use the

“educational production functions”—the relationship between inputs and outputs (through correlation or

multivariate analyses) or “cost-quality” studies—to speculate about why public school costs (inputs) keep rising

while student performance (outputs) does not.

From an economist’s perspective, an inefficient school or district is one that generates lower than

expected outcomes (outputs) with higher than expected expenditures (inputs). In the economists’ view,

inefficient schools lack the correct choice of input mix, given the price of inputs and value of outputs. As they

see it, no strong or systematic relationship appears to exist between school spending (for items such as

teacher salaries, teachers’ years of experience in the classroom, and class size47) and student

achievement/performance.48 By contrast, an efficient school or district is one that generates higher than

expected outcomes using lower than expected expenditures. A school or district is “cost efficient” if it can

produce the expected outcomes under given circumstances—including student population, school district size

and location, differences in competitive wages for teachers, and costs for health care, heating and cooling, and

transportation—at the minimum “cost.”

Accordingly, all efficiency analyses are relative. A high-achieving school may be effective but inefficient

if it is using more of the school inputs than needed (such as teachers or school facilities) to produce that level

of student achievement. On the other hand, a relatively low-achieving school may be making the best use of its

inputs (be efficient) but still be ineffective because student performance levels fall below what the community

believes acceptable.

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Economists posit two explanations for public schools’ alleged inefficiency. First, education’s incentive

structure does not guide education decision makers to maximize profits or to conserve costs. Unlike

profit-seeking organizations that gain much of their revenues from consumer purchases, public bureaus—such

as school districts—derive a large part of their funding from taxing authorities. As a result, the economic

incentives to enact cost-minimizing behaviors tend to be absent from public school officials as compared with

business leaders.49 Second, the government’s quasi-monopoly on providing education removes the need for

public schools to compete for students by generating superior outcomes at reasonable prices. This raises

questions about the nature, productivity, and efficiency of public school districts.50

The Budget Maximizing Theory and Public Schools

Economists traditionally assume that organizations are run by rationally self-interested individuals, and

(private) organizations try to minimize costs to increase their efficiency. By comparison, libertarian economist

William A. Niskanen’s budget maximizing theory assumes that public officials (i.e., civil servants such as school

district superintendents) who receive taxpayer funds from the government try to maximize the agency’s total

budget during their tenure. Since public officials typically do not receive performance-based salaries and

benefits as rewards for increasing their organization’s efficiency, as self-interested persons, they seek to

amplify their own effectiveness in largely non-monetary ways. These include increasing their public prestige,

widening their scope of activities, increasing positive outcomes, taking advantage of certain privileges,

amassing power and patronage by requesting larger annual budgets, and making management or changes

easier.51 Sometimes maximizing budgets also can mean higher salaries for these “senior bureaucrats.”52 The

increasing budget serves as a proxy for the public managers’ sense of personal worth to the organization, even

when they are highly motivated to serve the public interest.

Since evidence suggests that public organization officials systematically request larger budgets

regardless of whether the organizational output is high or low,53 public bureaus are hypothesized to produce

budgets that are larger than optimal. Hence, they yield output inefficiently or have performance deemed too low

when compared to expenditure levels.

In theory, budget maximizing helps ensure the public manager’s survival with both employees and

sponsors. In school districts, for example, superintendents and principals often use discretionary funds in ways

that keep teachers and administrators responsive, cooperative, and effective. Benefits such as tuition

reimbursement can satisfy staff and keep the organization’s reputation high. In addition, satisfied employees

are less likely to undermine leadership.

Likewise, survival opportunities abound in the information disparity between public officials and their

sponsors, giving officials convincing bargaining power over their financial plans.54 City managers lack the time,

information, and staff needed to monitor school district programs. Instead, they rely on school district

superintendents who have the responsibility, focus, and personnel needed to understand the entire scope of

the district’s comprehensive inputs, activities, and outcomes. The city council or board of supervisors (as

proxies for voters and taxpayers) directly advocate for budget items that reflect their priorities, approving parts

of the school district’s budget that match their goals (and disapproving those that don’t). They support the

superintendent who supports their preferences. By contrast, the city council or board of supervisors may force

the superintendent who does not support their preferences to resign. In this way, public managers try to enact

their sponsors’ preferences by acquiring larger and larger budgets or face resignation.55

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Notably, budget maximizing theory suggests constraints on public organizations’ budget increases.

First, the proposed budget must be equal to or greater than the minimum total production costs. Second, the

organization must perform as pledged with their increased budgets to keep their sponsors’ support. Over time,

organizations that do not produce the outcomes its sponsors expect—superintendents who consistently

promise more than their schools can deliver—will find themselves punished by having only lower budgets

approved. Conversely, organizations that consistently perform better than expected are likely to have higher

budgets approved.56

Budget maximizing theory has received praise for its merits and has mixed empirical support.57

Studies find that senior public sector administrators express the desire to moderately expand their programs;

public sector employees are slightly more likely to favor government growth; bureaus that gain a larger share

of the total budget tend to increase their share of staff and administrators; and bureaucrats in continuously

growing organizations tend to gain larger salary increases. In a positive spin, some see budget maximizing

behavior as granting public officials more professional discretion to use a portion of the organization’s

resources to meet their professional and personal goals. This degree of freedom gives them personal

satisfaction from allocating their organization’s resources rather than focus on maximizing profit or

productivity.58

Critics challenge budget maximizing theory as unrealistic, inaccurate,59 and too dependent on U.S.

culture.60 Empirical studies of resource efficiency in public schools suggest that school productivity varies

across districts, mostly as a result of differences in communities’ socioeconomic characteristics.61 Similarly,

investigations dispute the theory’s assumption that increased budgets lead to increased staff wages,62 or that

top decision makers passively resist bureaucratic demands for increased budgets.63 Rather, some contend

that senior public officials are professionals deeply committed to the tasks and goals they perceive to be in the

public interest; they are maximizing budgets mainly for public, not personal, gain.64 Others assert that public

sector managers have many diverse interests. Budget maximization is only one of many strategies used to

accomplish their goals; many goals do not require higher budgets.65 In a different vein, detractors note that

while budget managers (i.e., district superintendents and principals) may have more information in the

budgetary process, their sponsors retain the power to cut spending.66 Despite these weaknesses, budget

maximizing theory reflects certain realities and remains a standard explanation of bureaucracy’s behavior.

Baumol’s Cost Disease

Not all economists who see increasing public sector budgets tag the organizations as fiscally inefficient. In the

1960s, New York University business professor William Baumol observed that productivity—defined as the

quantity of product per dollar spent—in the labor-intensive services sector lagged behind manufacturing. He

concluded that rising wages do not necessarily reflect rising productivity. Rather, they are partly a response to

the upward salary pressure on jobs that have not experienced productivity gains.67 Because labor-intensive

services must compete for workers with other parts of the economy (but cannot cut personnel without reducing

output), costs continue to rise. Because labor markets across different sectors are connected, rising

productivity in manufacturing leads costs of labor-intensive services to rise, too.

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Baumol offers this example. Although the number of musicians and amount of time needed to play a

Beethoven string quartet has not changed since the late 18th century, four musicians today earn substantially

more than Beethoven-era wages. Earning 1800s’ salaries in a 21st-century economy would prompt the

talented players to abandon their music careers in favor of better-paying ones.68 Such actions would bring

string quartet output to zero.

Baumol’s cost disease (or the Baumol effect) is the rise of salaries in jobs that have experienced no

increase of labor productivity, in response to rising salaries in other jobs that have experienced the labor

productivity growth. Baumol’s theory is often used to explain why prices for services offered by

people-dependent professions with low productivity growth—such as public education—keep increasing even

though the amount of goods and services each worker produces does not necessarily follow suit. It also

explains why lawyers in Los Angeles, CA earn more than lawyers in Billings, MT. Arguably, service occupations

such as public education, health care, law enforcement, and the arts are labor-intensive professions.

Rather than see the rising costs of labor-intensive services without commensurate increases in

productivity as a sign of inefficiency, it may simply be that the rising costs of services (as compared to

manufactured goods) is an inevitable result of growing affluence and current standards of living. Although

economists debate the nuances of Baumol’s theory and the occupations to which it applies, most agree that it

is a potent tool for understanding the modern economic world. This is not to say that education cannot increase

its efficiency or improve its outcomes for students, however.

If the Shoe Doesn’t Fit, Don’t Wear It

Many question economists’ claims about public schools’ alleged inefficiency. For one thing, applying standard

economic models of private enterprise behaviors to public school officials’ behaviors is inappropriate.

Production function models cannot accurately portray or analyze public school fiscal practices because the

private and public organizations are not similar. Unlike private businesses, public schools are not—and cannot

be—“cost minimizers.” Rather, they are likely to be revenue maximizers whose available revenue determines

the unit cost.69 As Ludwig von Mises (1944), the ground-breaking Austrian economist observed, because

public bureaus specialized in providing “services whose value could not be exchanged for money at a per-unit

rate,” they could not “be managed by profit goals and traditional economic incentives.”70

Additionally, Jim Fortune and John O’Neil, education finance professor and practitioner, respectively,

contend that economists’ production function methodology is a “poor

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indicator” of how efficiently input dollars are transformed to student achievement as measured by test

performance. Schooling’s multiple dimensions mean that both single and multivariate representations of

input–output have methodological limitations that distort results.71 These statistical models cannot accurately

measure educational efficiency.

Likewise, education finance professors Kevin Welner and Bruce Baker assert that the charge that

public schools are economically inefficient and not cost-effective is more rhetoric than evidence-based.72 The

value of the education dollar is not tied to changes in the price of consumer goods. Rather, public schools are

working to achieve higher student outcomes for students of every demographic as well as attract and retain

high-quality and effective teachers and school leaders. Schools consume educational resources for their

inherent contribution to quality or other goals without their direct contribution to measured educational

outcomes. Moreover, the United States has 51 different education systems in 51 different political and

economic contexts with varying state spending capacities, effort levels, and educational goals. Some are doing

more with more and some are doing less with less.

Nonetheless, in a practical sense, efficiency analyses can be helpful in resource allocation. Efficiency

analyses use estimating statistical models with large numbers of schools or districts, usually over many years,

to determine which units achieve specific educational outcomes at a lower cost. Once schools or districts are

identified as more or less efficient, researchers explore variables that might explain why. For example, “Do

districts that do ‘X’ tend to be more cost-effective than those that do ‘Z’?” Or “did the schools or districts that

changed their practices from ‘C’ to ‘D’ improve their relative efficiency compared to districts that did not make

similar changes?” In fact, efficiency analyses have been used to address a range of practical issues, such as

whether school district consolidation cuts costs and identifying the most cost-efficient school districts size;73 or

whether allocating larger shares of school district spending to instructional budget categories is a more efficient

way to generate better educational outcomes.74 Of course, these studies do not always generate clear-cut

policy recommendations because although many use rigorous methodologies, they face limitations in data

availability and quality and generate varying results when applied in different settings.75

Educational leaders wanting to be more economically efficient in managing their districts and schools

need to separate the efficiency rhetoric from the reality. They benefit when they look for policy ideas that have

empirical support for approaches successfully tested in the “real world” of American public schools. They use

high-quality, peer-reviewed guiding documents that include detailed and substantive cost-effective,

cost–benefit, or efficiency analyses in schools like their own. They rely on resource allocation strategies that

allow them to factually justify their conclusions and policy recommendations. Judicious school leaders also

recognize whether the efficiency reports come from think tanks and foundations that have a political agenda

and weigh their recommendations accordingly.

Page 181

CONCLUSION

Equity, adequacy, and efficiency are three issues at the heart of funding student learning. Financing education

often depends on values and other subjective factors determined in the political process of state government.

Economists do an injustice to education and educators when they try to analyze public schools with a

conceptual model never intended for this purpose. Public schools are not like private enterprises. The inputs

required for business outputs are discrete and measurable whereas the inputs for education to produce

increased student achievement are too variable—with many outside the school’s control—to fit neatly into a

linear production function equation. Students of educational leadership need to know how to respond

intelligently to stakeholders’ concerns in these three areas.

CASE STUDY

Assume you are the new principal of Alpha High School, a 45-year-old building. Your school serves the “blue

collar” side of town. Omega High School, the other high school in the district and only four years old, serves

the “white collar” side of town. Both schools are held to the same high accountability standards. Based on the

data in Table 7.6, address the issues of equity, adequacy, and efficiency between the two high schools.

Page 182-187

NOTES

1 Brown, L. (1977). School finance reform in the seventies: Achievements and failures. Washington, DC:

U.S. Department of Health, Education, and Welfare, Office of the Assistant Superintendent for Planning and

Evaluation and Killelea Associates.

2 General Accounting Office (1997). School finance: State efforts to reduce funding gaps between poor and

wealthy districts. Washington, DC: Author.

3 Jackson, C., Johnson, R., & Persico, C. (2016). The effects of school spending on educational and

economic outcomes: Evidence from school finance reforms. The Quarterly Journal of Economics, 131 (1),

157–218.

4 Two leading equity researchers, Robert Berne and Leanna Stiefel, distinguish between horizontal and

vertical equity. Michael Rebell, Director of Teachers College, Columbia University’s Center for Educational

Equity, follows equity and adequacy issues. Valuable information can be found at their website:

http://schoolfunding.info and www.centerforeducationalequity.org

5 An easy way to remember this is that the word horizontal contains a Z. Take out the diagonal line between

the two horizontal lines and you have the = (equals) symbol—equals should be funded equally.

6 An interesting project for the class would be to examine horizontal equity within schools in one district

over a large measure, such as per pupil expenditures at the elementary, middle, and high school levels,

student–teacher ratios across the same levels, and equal teacher resources.

7 Berne, R. & Stiefel, L. (1984). The measurement of equity in school finance. Baltimore, MD: Johns

Hopkins University Press.

8 Owings, W. & Kaplan, L. (2010). The alpha and omega syndrome: Is intra-district funding the next

ripeness factor? Journal of Education Finance, 36 (2), 162–185.

9 Verstegen, D.A. (2014, March 15). How do states pay for schools? An update of a 50-state survey of

finance policies and programs. Policy Brief. Association for Education Finance and Policy Annual Conference,

San Antonio, TX. Retrieved from

https://schoolfinancesdav.files.wordpress.com/2014/04/aefp-50-stateaidsystems.pdf

10 Parrish, T.B. & Verstegen, D.A. (1994). Fiscal provisions of the Individuals with Disabilities Education Act:

Policy issues and alternatives (Policy Paper No. 3). Palo Alto, CA: American Institute’s for Research, Center for

Special Education Finance.

11 Rossmiller, R., Hale, J.A., & Frohreich, L.E. (1971). Educational programs for exceptional children:

Resource configurations and costs. National Educational Finance Project, Special Study No. 2. Madison, WI:

Department of Educational Administration, University of Wisconsin. Retrieved from

https://files.eric.ed.gov/fulltext/ED052516.pdf

12 Berne & Stiefel (1984).

13 For an excellent overview of fiscal neutrality measurement, see Alexander, K. & Salmon, R. (1995). Public

school finance. Boston, MA: Allyn & Bacon, Chapter 9.

14 Rebell, M.A. (2002). Educational adequacy, democracy, and the courts. In T. Ready, C. Edley, Jr., & C.E.

Snow (Eds.), Achieving high educational standards for all. Conference summary (pp. 218–268). Washington,

DC: The National Academies Press. Retrieved from www.nap.edu/read/10256/chapter/13

15 Alexander & Salmon (1995), p. 193.

16 Alexander & Salmon (1995), p. 194.

17 Alexander & Salmon (1995), p. 197.

18 California Education Code 41975-41975.5.

19 Virginia Department of Education (2018). 2018–2020 Composite index local ability-to-pay. Richmond, VA:

Author. Retrieved from

www.doe.virginia.gov/school_finance/budget/compositeindex_local_abilitypay/2018-2020/compositeindex1820.

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20 Early education finance researchers include Ellwood Cubberley, Robert Haig, Roe Johns, and others.

21 Verstegen (2014, March 15).

22 Morgan, I. & Amerikaner, A. (2018, February 27). Funding gaps 2018. Washington, DC: The Education

Trust. Retrieved from https://edtrust.org/resource/funding-gaps-2018/

23 United States Commission on Civil Rights (2018, January). Public education funding inequity in an era of

increasing concentration of poverty and resegregation. Briefing Report. Washington, DC: Authors. Retrieved

from www.usccr.gov/pubs/2018/2018-01-10-Education-Inequity.pdf

24 Imazeki, J. & Goe, L. (2009). Distribution of highly qualified, inexperienced teachers: Challenges and

opportunities. Teacher quality research and policy brief. Washington, DC: National Comprehensive Center on

Teacher Quality. Retrieved from https://eric.ed.gov/?id=ED520728

25 Grissom, J.A. & Bartanen, B. (2018). Principal effectiveness and principal turnover. Education Finance

and Policy. Retrieved from https://doi.org/10.1162/edfp_a_00256

26 Kini, T. & Podolsky, A. (June 3, 2016). Does teaching experience increase teacher effectiveness? A

review of the research. Palo Alto, CA: Learning Policy Institute Retrieved from

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27 Kini & Podolsky (June 3, 2016); Kerachsky, S. (2010). Briefing on the condition of education 2010.

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28 National Center for Education Statistics (2010). Special analysis 2010. High poverty public schools. What

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29 Coley, R.J. & Baker, B. (2013). Poverty and education: Finding a way forward. Princeton, NJ: ETS.

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30 Baker, B., Weber, M., Srikanth, A., Kim, R., & Atzbi, M. (2018). The real shame of the nation: The causes

and consequences of interstate inequity in public school investments. Philadelphia, PA: Education Law Center.

Retrieved from https://drive.google.com/file/d/1cm6Jkm6ktUT3SQplzDFjJIy3G3iLWOtJ/view

31 Rubenstein, R., Schwartz, A.E., Stiefel, L., & Amor, H.B.G. (2007). District to schools: The distribution of

resources across schools in big city school districts. Economics of Education, 26 (5), 532–545.

32 Odden, A. & Picus, L. (2004). School finance: A policy perspective, 3rd ed. New York: McGraw-Hill, p. 25.

33 Jackson, Johnson, & Persico (2016).

34 Abbott v. Burke, 100 N.J. 269, 495 A.2d 376 (1985).

35 Abbott ex rel. Abbott v. Burke, 199 N.J. 140; 971 A.2d 989 (2009).

36 Abbott XXI, 20 A. 3d. 1018 (N.J. 2011).

37 Rose v. Council for Better Education, 790 S.W. 2d 186 (Kent, 1989).

38 For example, Picus, L., Odden, A., & Fermanich, M. (2003). Assessing the equity of Kentucky’s SEEK

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39 Baker, B. (2005). Adequacy studies. Education Week Special Analysis. Retrieved from

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40 Chambers, J. & Parrish, T. (1983). The development of a resource cost model funding base for education

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41 Reschovsky, A. & Imazeki, J. (2000). Developing a cost index for school districts in Illinois. Paper

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42 Abbott v. Burke, 710 A.2d 450 (1998).

43 Blais, A. & Dion, S. (1990, Summer). Are bureaucrats budget maximizers? The Niskanen Model & its

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44 Hill, P. & Roza, M. (2010, July). Curing Baumol’s disease: In search of productivity gains in K-12

schooling. White Paper #2010_1. Seattle, WA: Center on Reinventing Public Education. Retrieved from

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45 Actually, each of the nation’s commonly identified racial and ethnic subgroups has shown meaningful

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47 Studies indicate that class size reductions are most beneficial in grades K–3. See: Nye, B., Hodges, L.V.,

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75 See, for example, Duncombe, W. & Bifulco, R. (2002). Evaluating school performance: Are we ready for

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