Lecture 1: Introduction to Educational Finance

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Lecture 1Introduction to Educational Finance

• EDA 757/PPA 730
• Fall 2002

Based partly on presentation developed by
Professor Bruce Baker, University of Kansas.
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Lecture Outline

• Introduction to education finance
• Importance
• Dimensions to the field
• Stylized facts about U.S. system
• Trends
• International context
• Key issues in designing finance system
• Objectives
• Key actors and fiscal tools
• Behavior of key actors

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Importance of Education Finance

• School finance concerns the distribution and use
  of money for the purpose of providing educational
  services and producing student achievement.(Odden
  and Picus, 1)
• School districts allocate scarce resources to
  programs and services through the budget process.
  As a result, it is one of the most important
  activities undertaken by school districts.
  (Hartman, 1999, introduction)
• Everything within the contemporary public school
  district revolves around the efficient and proper
  functioning of the organization to enhance
  learning. School district business management is
  vital in order for teaching and learning process
  to occur. (Wood, et al., 1995, 1)

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Dimensions to Educational Finance

• Revenue Where does the money come from?
• Topics covered in the class
• The principles of designing and evaluating school
  aid systems (lectures 1 and 2).
• New Yorks school aid system (lecture 3).
• Property tax administration and evaluation in New
  York (lecture 4)

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Dimensions to Educational Finance

• Budgeting How much needs to be spent, and how
  should the budget be allocated?
• Topics covered in the class
• Understanding the budget document and process
  (lecture 5)
• Budget preparation and cost analysis (lectures 6
  and 7)
• Budget approval presenting a budget (lecture 8)
• Budget control and accountability (lecture 9)

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Dimensions to Educational Finance

• Financial management How do school districts
  manage their financial resources efficiently?
• Topics covered in the class
• Accounting the language of finance (lecture 10)
• Basics of school business administration(lecture
  11)
• Basic financial management functions (lecture 12)
• Capital and debt management (lecture 13)

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Stylized Facts about U.S. Education Finance System

• Key Trends
• Per pupil spending has grown rapidly even
  adjusting for inflation. However, spending growth
  has slowed down significantly in the 1990s
  (Figure 1-1).
• Rapid decline in the number of school districts
  since 194088 of districts have been eliminated
  or consolidated (Figure 1-2).
• Increased role of state governments in financing
  schools. Federal share of financing is small,
  and growth has been erratic (Figure 1-3).

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Source NCES, Digest of Education Statistics,
2001, Table 167.
9
Source NCES, Digest of Education Statistics,
2001, Table 89.
10
Source NCES, Digest of Education Statistics,
2001, Table 157.
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Stylized Facts about U.S. Education Finance System

• Putting US into international context
• US has one of the most decentralized education
  finance systems in world.
• Spending per pupil in US in primary education is
  second only to Demark among industrial countries.
• Spending as percent of GDP in US is about
  average.
• Class sizes in primary schools in US are lower
  than most industrial countries.

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Stylized Facts about U.S. Education Finance
System

• Significant variation exists across states and
  regions
• Spending levels New Jersey spends 2.4 more per
  pupil than Utah. NE states are high spenders,
  southern and Rocky Mountain states are low
  spenders (Figure 1-5).
• Centralization Large difference in state share
  of finance. NE states more decentralized, western
  states more centralized (Figure 1-6).
• Spending equality NE states are most unequal,
  West and South are most equal. New York was 6th
  most unequal in 1994.

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Figure 1-5 Per Pupil Spending Across the US
Adjusted for regional variations in cost of
living (source NCES 1998)
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Figure 1-6 Centralization of School Finance
(State Share)
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Key Trends in New York School Finance

• New York has decentralized school finance
  systemnot significant change since 1980. If
  STAR included then recent significant increase in
  state share (Figure 1-8).
• Large fluctuations in inflation-adjusted spending
  and state revenue growth. State aid is
  particularly sensitive to economy (Figure 1-9).

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Source NY SED, Analysis of School Finances in
New York State School Districts, 1999-00, Table 1.
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Source NY SED, Analysis of School Finances in
New York State School Districts, 1999-00, Table 2.
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Key Components in Designing School Finance System

• Objectives
• Key actors intergovernmental system
• Fiscal tools
• Matching tools and objectives
• Behavior of local school districts in response to
  state fiscal policy

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Possible Objectives of School Finance System

• Adequacy Help districts raise student
  performance to meet standards.
• Equity Reduce disparities across districts and
  students.
• Efficiency Maximize benefits of each dollar
  spent.
• Local control Allow districts to meet special
  local conditions and preferences.
• Tax equity Minimize tax burden on low income
  households.
• Likely to be tradeoff between objectives.

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Key Government Actors Intergovernmental System

• Local school boards/superintendents.
• State governors, legislatures.
• State education departments.
• State courts.
• Federal government.

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Locus of Control?
Federal
1. Increased equity 2. Increased bureaucracy 3.
More rational control 4. Distant from point of
need Note some research indicates that state
governments spend cumulatively less than local
governments when the shift is made.
1. Increased local interest 2. Increased
disparity Note Some suggest that local control
over spending decisions helps retain voter
interest in the quality of services.
State
Local
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Education FinanceConstitutional Basis

• Most states assume constitutional responsibility
  for providing an X system of education. This
  places control of the provision of education in a
  tug of war between legislators who develop the
  state budget and supreme courts who interpret the
  state constitution, making education a
  particularly unique public service.

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Courts vs. Legislatures?
CONSTITUTIONS
State Supreme Courts
Legislative Executive Branches
Question Can a supreme court impose a remedy
that requires a new tax to be levied?
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Key Fiscal Tools

• Local property taxes.
• Other local revenue (sales taxes, fees and
  charges, commercial contractssoda contracts.)
• State school aid.
• Federal education aid.
• State-funded property tax relief.
• State and federal regulations.

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Matching Tools and Objectives

• Local revenue
• Encourages efficient use of resources and allows
  maximum local control
• But can lead to significant inequality across
  districts, and low taxpayer equity.
• State aid (or state property tax relief)
• Can help improve equity across districts and for
  low income taxpayers.
• But may discourage efficient use of resources,
  and lead to more state control over spending
  decisions.

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Local Response to State Fiscal Policy

• Response to state aid
• Use all aid to raise spending
• Use some aid to cut local taxes
• Change types of programs and funding choices to
  increase state aid.
• Response to property tax relief
• Raise property tax rates
• Reduce use of other revenue sources
• Change economic development strategies.
• It is very important in designing state fiscal
  policies to anticipate local reaction!!!!

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Key Issues in Designing School Finance System

• What is objective?
• State versus local share of financing?
• What types of taxes should local school districts
  have access to?
• How and should state provide property tax relief?
• What types of grants should be used?
• Should state restrict local choiceshow and when?