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Education 1 - Funding

© Allen C. Goodman, 2015

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Some Numbers

• Government puts together lots of numbers.

• Good source – Digest of Education Statistics, http://nces.ed.gov/search/

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Share has risen but not that much

Education Expenditures as Pct of GDP

0.0

1.0

2.0

3.0

4.0

5.0

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8.0

9.0

1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Year

Pe

rce

nta

ge

s

All

Elem/Sec

Post-Sec

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Compare it to HealthExpenditures as % of GDP

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2.0

4.0

6.0

8.0

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14.0

16.0

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20.0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Year

Pe

rce

nta

ge

Education

Health

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Differences

• What are the differences in the sectors?

6http://www.nea.org/assets/img/content/NEA_Rankings_And_Estimates-2013_%282%29.pdf

7http://www.nea.org/assets/img/content/NEA_Rankings_And_Estimates-2013_%282%29.pdf

8http://www.nea.org/assets/img/content/NEA_Rankings_And_Estimates-2013_%282%29.pdf

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2007-2008 – Old

Instruction Support services

Salaries and Employee Salaries and EmployeeTotal 1 wages benefits Total 1 wages benefits

United States................................................................10,259 6,233 2,133 6,211 4,206 1,420

Illinois............................................................................10,246 6,149 1,949 6,022 4,155 1,264Indiana...........................................................................9,036 5,240 2,529 5,324 3,518 1,660Iowa..............................................................................9,267 5,987 1,826 5,643 4,026 1,221Michigan........................................................................10,069 5,545 2,598 5,729 3,589 1,648Minnesota......................................................................10,140 6,408 1,973 6,477 4,507 1,396Wisconsin.......................................................................10,680 5,734 2,995 6,475 4,100 1,976

Geographic area

Michigan benefits higherMichigan wages lower

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General Issue

• Equality of Funding• We looked at this a little bit earlier on.• Suppose you have 2 districts

– District1 – Tax Base = $200,000– District2 – Tax Base = $100,000

• If they both have a 2.5% property tax rate, then D1 will raise $5,000 for schools, while D2 will raise only $2,500 for schools.

• For D2 to raise as much they must pay double the tax “price.”

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Opportunity

• Most of our Tiebout discussion has to do with localities picking their tax rates and their levels of public services.

• It suggests however that poorer people will get lower levels of public services.

• Many view this type of thing as “unfair.”• Premise here is that unequal inputs

unequal outputs. We’ll talk more about outputs in next class.

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Various Ways to Equalize Aid

• Try to equalize expenditures

• Try to equalize the tax base– Fisher argues that the tax base equalization

could induce districts to spend more, by decreasing the cost per $ spent.

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GTB Formula (and worksheet)

Consider a formula of the type:

Gi = B + (V* - Vi) ri, where:

Gi = grant

B = Basic or Foundation Grant

V* = Guaranteed per-public tax base

Vi = Per pupil tax base in district i.

ri = Tax rate per thousand dollars in district i.

Difference tomake up Tax effort!

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GTB Formula (and worksheet)Consider a formula of the type:

Gi = B + (V* - Vi) ri, where:

Gi = 0 + ($200,000 – $50,000) ($40/$1,000), where:

Gi = grantB = Basic or Foundation GrantV* = Guaranteed per-pupil tax baseVi = Per pupil tax base in district i.ri = Tax rate per thousand dollars in district i.

Gi = $6000; own effort = $2000

If you raise r by $1 in your district, it is raised by (V* - V)/V times; Here (200 – 50)/50. So a $1 tax gets a $3 match.Implicit tax price = 1/(1+3) or 25%. Let’s look at spreadsheet.

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Do these grants more spending?

• Really depends on the price elasticity of demand for education.

• If demand is price inelastic, quantity of education will not rise. Grants will simply replace existing $.

Ed Spending

All Else

E*

A*

A**

E**

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Hoxby (2001)

• Looks at states in 1990.• Relates characteristics of state’s financing

systems to actual spending.• Spending increased with GTB formulas

and lower tax prices for low-wealth, low-spending districts, but …

• Substantial amount of equalization comes by limiting the highest spending districts called “leveling down.”

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Coefficient of variation

• The coefficient of variation is a dimensionless number that allows comparison of the variation of populations that have significantly different mean values.

• It is often reported as a percentage (%) by multiplying the above calculation by 100.

• Idea: If you’re comparing high income districts to low income districts, you might expect the high income districts to vary a little more because there’s more of a “top end.”

• CV controls for the higher mean.

.std deviationCV

mean

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

Coefficient of Variation

D1 D2 = D1 + 500 D3 = 1.1*D1

5000 5500 5500

6600 7100 7260

7000 7500 7700

8000 8500 8800

9000 9500 9900

10000 10500 11000

11000 11500 12100

12000 12500 13200

Std. Dev. 2370 2370 2607

Mean 8575 9075 9432.5

CV 0.27637324 0.26114607 0.27637324

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Michigan School Finance

• Prior to 1974, CV was about 0.16.

• By 1980, it was 0.17, and by 1994 it had increased to 0.23.

• In 1978 local property taxes about ½ of school revenue.

• By 1994 local property taxes about 2/3 of revenue.

• Property tax burden was 7th highest in US.

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In 1994 – new system

• Foundation guarantee, F– F is determined by 1993/4 level, plus allowed

annual increases.– Districts > $5,000 get % increases equal to %

growth of state school aid revenue multiplied by basic foundation (which started at 5000).

– Those below $5,000 receive up to double these percentage amounts.

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18 Mills = 1.8%

• Each district is supposed to levy 1.8%.• State provides the rest.• Highest spending districts levy additional

property taxes to reach the levels they want.

• Over time foundation grows, and would presumably lower CV, because we’re giving the poorer districts higher % increases.

State largely substituted itself for thelocal property tax base. If state $/studentwere larger than locality, local tax bite fell.

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Cullen and Loeb (2004)

1. State now generates more than 75% of funding for schools.

2. Most of the funding comes from increase in state sales tax from 4% to 6%

3. Level of school spending increased by 9% (real) from 1990 to 1998.

4. CV fell from 0.22 in 1991 to 0.13 in 2000.

Cullen, Julie Berry and Susanna Loeb, 2004. “School finance reform in Michigan: evaluatingProposal A” in J. Yinger, ed., Helping Children Left Behind: State Aid and the Pursuit ofEducational Equity (Cambridge, MA: MIT Press), pp. 215-50.

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Issues

• Although inputs , did outputs ?

• Some high spending districts were not allowed to spend as much as they would like.– Solution? Fees like athletic or music fees.– Stop providing items where there are

plausible private substitutes – e.g. driver training.

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More Issues

• Per pupil funding, while plausible, can impose hardships on districts with falling enrollments.

• Consider SD with:– 4 elem schools (50 students/grade * 5 grades

each) = 1000 students– 1 middle school (200 students/grade * 3

grades) = 600 students– 1 HS (800 students over 4 grades)

2400 Students

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More Issues

• Consider SD with:– 4 elem schools (50 students * 5 grades each) = 1000

students– 1 middle school (200 students * 3 grades)– 1 HS (800 students)

• Suppose enrollment in ES falls by 4 students/grade = 8%, or 2 students/class.

• Fall of 80 students. ES Funds fall by 8%. Total students by 3.3%.

• What do you cut?

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Suggests

• Short term problems in all areas where schools are growing.

• Places like southern Oakland County.– Ferndale, Royal Oak, Hazel Park are losing students.– Walled Lake, South Lyon are gaining students. You

have about the same numbers of students, but you have schools in the wrong places.

• Political problems consolidating and/or closing schools.

• Look at City of Detroit!• Is this formula necessarily bad? Is there

something better?