Investing in Education: The Costs and Benefits of Statewide Funding for Education
by Paul Crocker
ABSTRACT
The gap in earnings and wealth between the poorest and richest in America is widening. One cause of this is that children from wealthy families receive better education than children from poor families. If poorer students are not as well educated, they are often unable to achieve high paying jobs or pass on wealth. Thus, the inequalities are perpetuated from one generation to the next.
This paper studies the effects of using a statewide funding system for education (as opposed to a predominately localized system) on student achievement and reductions in income inequality. The paper looks at the potential benefits of providing equalized funding for all students based on the premise that: if children from poor families are better educated from an early age, they will be more likely to graduate, pursue higher education, and obtain higher paying jobs. As a result, students will be able to pass wealth on to their own children, having the potential to reduce the growing income and wealth disparity. This paper studies the aggregate and individualized effects of using a statewide system versus a localized system. The paper also analyzes the problems that could arise, and have arisen, from a statewide system. Finally it looks at the overall impact of equalization on both disparities in achievement and the average amount of achievement obtained as a result of utilizing either a statewide or localized funding system.
Table of Contents
Background on Economic Inequalities in America 4
The Cost of Economic Inequality 5
A Recent History of Public Education 7
The Federal Courts’ View 7
On the State Level 8
Economic Externalities Regarding School Funding Systems 11
An Analysis of Two States 13
Serrano v. Priest and California’s Reforms 13
Retrospective Analysis of California’s “Statewide” Funding System 15
Massachusetts’ Reforms 16
Retrospective Analysis of Massachusetts’ “Statewide” Funding System 18
Establishing a Working System 18
Does Society Benefit from Increased funding? 19
A Proper Framework 21
Concerns With a Statewide System 23
Resolution of Concerns 24
Conclusion 25
Economically segregated classes have existed in America since its very inception. Likewise, life has been more challenging for the poorer Americans. While land ownership requirements for voting and many other such laws, which discriminated against the poor, have been abolished, and the burden on the most impoverished of America has eased in some respects, income and wealth inequalities continue to exist in America. While the author is unaware of any society in which there was perfect equality (except Communist nations, in theory), economic inequalities are still a concern for this nation.
The simple truth is that poverty is bad for America. Poverty causes homelessness and increased crime rates; further, drug use is higher amongst the poor.[1] While poverty in America can never be completely wiped out, steps can be taken to address present inequalities and make wealth and income distribution more equal across classes.
This paper looks at the potential effects of altering funding mechanisms for primary and secondary schools, looking at whether income and wealth inequalities could be reduced if schools shift from a predominately localized funding system to one which is exclusively funded from state and federal sources, with the intention of providing more funding to poorer schools. Presently, funding for education comes from three sources in all states: the Federal Government, State Governments, and localized funding initiatives.[2] The Federal Government provides approximately the same percentage of funding to all states – only 9.1%, on average.[3] However, state governments provide vastly different amounts of funding. Some states provide almost all the remaining funds from state sources, while other states only provide a small percentage of funds and leave the matter to local school districts to obtain needed funds from their local communities.
Localities often use property taxes to fund their schools. While property taxes provide revenue for schools consistent with the communities’ abilities to pay, given the wide disparities in property values between wealthy and poor school districts, this results in disparities in school funding (and, thereby, their effectiveness). The utilization of property taxes and localized funding allows wealthy communities to have lower tax rates, and have better funded schools.[4] Meanwhile, poorer communities must utilize higher tax rates, to compensate for the smaller tax base; yet, the end result is worse funded schools which produce students that are unable to compete with students from better funded schools when it comes to college acceptance and seeking employment. Thus, students from worse schools, who lack proper education, are more likely to only obtain low-paying jobs, hence their own children will only receive the same, sub-average, education, perpetuating the cycle ad infinitum.[5]
Such perpetuation of poverty should be avoided, if economically possible. Poverty creates wide-reaching concerns – not just for the poor themselves – but for society as a whole. There are direct effects of poverty (e.g. increased crime rates and governmental expenses for the poor). However, there are many opportunity costs associated with poverty – poor are less able to interact in the market place to purchase and produce goods and services. Further, the aggregate effects of a redistributive program that creates more funding for poorer schools could have far reaching effects from increases in gross domestic product to expanding scientific creation.
While there are certainly people living in poverty who simply refuse to be gainfully employed (thereby making pure equality impossible), there are also a large number of children who could become great leaders and businesspeople, but, under the present funding system, will never receive the education that may help them to live up to their potential. As there are multiple positive externalities received by society from education, society’s failure to assist these children in achieving their potential is a cost that everyone must bear.[6]
Background on Economic Inequalities in America
Wealth and income inequalities are measured on a number of scales. A predominant one is the Gini index. The index measures the degree of income inequality in societies. A Gini index of 0.0 shows perfect equality (each person gets the same amount of income), while a Gini index of 1.0 suggests perfect income inequality (the entirety of a society’s income is made by one individual).[7] In 2003, the Gini Index for America was 0.45.[8] After consideration of taxes and transfers, the Index decreases to about 0.39.[9] This is an increase from 1980 when the two measurements were 0.403 and 0.352, respectively.[10] Applying actual dollar amounts, this means that in 2004 individuals in the 90th percentile earned $120,924 each year, while individual earners in the 10th percentile earned $10,927.[11]
The Cost of Economic Inequality
While many in America argue for reduced governmental taxation and spending –arguing that ‘giving people a handout simply eliminates their motivation to work’ – and, while it is true that providing government assistance (or a “safety net”) may cause people to, on the fringes, select government aid in lieu of employment, such arguments, in large part, do not apply to the provision of education. As discussed below, the inherent problems with many governmental programs do not exist or are mitigated regarding statewide school funding programs. This paper focuses on the potential returns that will result from equalizing funding for primary and secondary education. While such a scheme would result in some redistribution of income, the redistribution should produce large returns on investment, while still requiring those that wish to take advantage of the opportunities to work hard in order to receive anything from the program.
As a simplified example, consider two scenarios. In the first, a child from a poor family receives a bad education which results in a low-paying job. The person needs government assistance to obtain housing and health care, feed his family, and live through retirement. In the second scenario, the same child is born to the same family; however, he goes to a well-funded school as a result of redistribution of funding. He receives a good education, is able to continue through a university level, and, eventually, obtains a good paying job. He can now support his own (and his family’s) needs without resort to government assistance. Moreover, instead of the government having to supplement the person’s whole life, the person will make enough to pay taxes into the government to support others. As a result, the tax base will broaden, and tax rates can be reduced across the board.
As noted above, there are serious problems that arise from poverty; poverty has been tied to crime rates, drug use and homelessness.[12] Moreover, there is an extensive opportunity cost for all society when people, rather than live up to their potential, are forced into poverty. In ascertaining the effects of utilizing a purely national financing system (rather than a purely local system) in a model economy, calibrated using U.S. data, Fernandez and Rogerson find that, in addition to equalizing income across classes, “a policy of national financing leads to higher average income . . . and higher welfare.”[13] Higher income could have broad effects on the national economy, from reducing poverty, to creating more competition for higher level employment positions. A situation that provides everyone the skills they need to pursue college and a well-paying career could have the effect of either reducing taxes or permitting more spending initiatives. Put simply, if an individual earns more money, the government’s tax base is increased, and tax rates can be reduced while an equal or greater amount of revenue is brought in by the government.
Beyond increases in the tax base, there are other benefits to such a situation. Opportunity costs extend beyond government taxation programs. If more people receive better educations, companies will be better off as well. As students in poor districts are better educated, their opportunity for employment will broaden and jobs can be made available to them that would not have been otherwise available. Such opportunities will have benefits, not only for people from poor families, but also for the corporations that employ them.
As the pools of applicants expand, companies will have broader selection of employees, allowing them to select the best qualified candidate from a larger selection pool. This will also increase competition for the aforementioned positions. Moreover, as the supply of potential employees increases, the price paid to the employees will decrease.
A Recent History of Public Education
The Federal Courts’ View
In 1973, the U.S. Supreme Court decided San Antonio Independent School District v. Rodriguez.[14] The Court held that equal funding is not required by the Constitution.[15] “Education, of course, is not among the rights afforded explicit protection under our Federal Constitution. Nor do we find any basis for saying it is implicitly so protected.”[16] In buttressing their decision, the court finds:
In sum, to the extent that the Texas system of school financing results in unequal expenditures between children who happen to reside in different districts, we cannot say that such disparities are the product of a system that is so irrational as to be invidiously discriminatory. . . . The Texas plan is not the result of hurried, ill-conceived legislation. It certainly is not the product of purposeful discrimination against any group or class.[17]
The Court concludes by naming those responsible for reform. “But the ultimate solutions must come from the lawmakers and from the democratic pressures of those who elect them.”[18]
Despite the Court’s holding in San Antonio, that education is not a protected right provided for under the United States Constitution, the Federal Government provides some support, through a variety of programs, to primary and secondary schools across America. For the 2004-05 school year, the Federal Government provided, on average 9.1% of the total funding to these schools.[19] These contributions ranged from 4.2% of total funding in New Jersey to 18.9% in Alaska.[20]
On the State Level
As it is the states’ responsibility to determine funding for education, a requirement that the state establish a system of public education is incorporated into all state constitutions.[21] For example, the Oklahoma Constitution requires, “The Legislature shall establish and maintain a system of free public schools wherein all the children of the State may be educated.”[22] Thus, lawsuits are often directed at state constitutions. San Antonio simply directed that suing under state constitutions was the proper course.
There are many alternative methods[23] for obtaining funds to be used in public schools. This paper focuses on predominately localized funding and statewide funding and the results which occur from these. Under a localized system, a majority of funds come from the local community in which the school is located. For the 2004-05 school year, nearly 44% of primary and secondary school funding, on average, came from local sources.[24]
While the Federal Government’s contributions ranged from 4.2% to 18.9% of total funding, the greatest difference in funding contribution comes from a state-by-state analysis of state versus localized funding.[25] As states have broad discretion to determine the amount of funding students receive, as well as, the source of these funds, it is not surprising that such dichotomies between states emerge. The greatest example of this is a comparison of Nebraska, which only provided 31.1% of funding from state sources (leaving localities responsible for 58.5% of school funding), and Hawaii, which provided 87.4% of funding from state sources (leaving localities responsible for only 2.2% of school funding).[26]
Since 1971, at least twelve state supreme courts have overturned their state’s education financing systems on constitutional grounds.[27] However, the systems that replaced the overturned systems have varied widely, and some states have been slow to implement changes.[28] Just as the new systems varied, so did the effects of the systems. Despite courts ruling many traditional systems unconstitutional, many states continue to rely heavily on a traditional method of funding: local property taxes.[29] Moreover, no state provides all funding at the state level: all states continue to utilize at least some localized funding for public education.[30]
A key case in the movement for school funding reform was the Serrano decision. In 1971, the California Supreme Court decided Serrano v. Priest.[31] The issue in “Serrano I” was the constitutionality of localized funding measures in California – under a claim that the poor were unconstitutionally discriminated against by the unequal funding measures currently in place.[32] Even after remand, on review in 1976, the court continued to hold the state’s prior system unconstitutional.[33] Eventually, “Proposition 13” was passed, amending the California Constitution to explicitly require a state-wide funding system for education.[34] As discussed below, the results of the constitutional amendment, and the unconstitutionality of the former funding scheme, California quickly shifted funding methods towards an equalized funding system.[35]