Financing of Public Schools ArticleDecember 12, 2001
Jerry L. Coker
Coppell Education Development Corp.
131 Tennyson Place
Coppell, Texas 75019.
Dear Jerry L.:
itt
Manager
:kb
Enclosure
TM E • C 1 T Y • O F
COFFELL
RE: Article from the Federal Reserve Bank of Dallas
Here is a little article out of the Federal Reserve Bank of Dallas regarding public school
financing in Texas. I thought you might find this of interest.
255 PARKWAY * P,0.60X 478 * COPPELL_ TX 75019 * TEL 972/48.2 0022 * FAX 972/304 3673
r
Southwest Economy
Tough Decisions
for Argentina
Issue 6 November /December 2001
• • • • • • • • • • • • • • • • • • •
The Texas Legislature will spend more than
$11 billion this year to fund public schools. Over
the years, the state has helped educate millions
of children, enhancing the productivity of the
workforce and the vitality of the economy. Public
education has been a good investment for the
state. But disbursing $11 billion is no easy task.
Texas' finance formula has been subject to recur-
rent legal challenges. Recently, the state Legisla-
ture formed a special committee to evaluate the
way funds are distributed and to possibly recom-
mend improvements.
The state has an ambitious finance formula
that distributes funds based on a school district's
size, property wealth and other factors. Some dis-
tricts receive substantial aid. Part of the formula —
nicknamed Robin Hood — requires districts that
are considered wealthy to give money to help
other districts. Although it is intensely controver-
sial, the Texas plan has bolstered many of the
state's poorest schools and garnered national
acclaim in so doing.
As the state takes a fresh look at public school
financing, it is a good time to explore the economics
(Continued on page 2)
b ut
J. Econ omy after Sept 11
The terrorist attacks of Sept. 11 have profoundly affected the well -being
of U.S. citizens. Our sense of invulnerability is gone. Comparable events are
the October 1973_ Arab oil embargo, which challenged our assumptions about
the continued availability of abundant, cheap energy, and the October 1957
Sputnik launch, which raised fears of intercontinental missile attack. Both of
those shocks triggered important changes in spending priorities. Both hit a
U.S. economy that had already been slowing. Both were accompanied or
promptly followed by recessions.
We can never know with certainty how the economy would have
evolved had the Sputnik launch, the oil embargo or the Sept. 11 attacks not
occurred. Such events are rare, and each has unique aspects. Moreover, our
(Continued on page 6)
of school finance. Texas has a strong
educational funding system. That system
can be further strengthened by address-
ing some of its unintended consequences.
Public Education Can Be
a Profitable Investment
Most people agree that there is an
important role for the public funding of
education.' The public benefits when in-
dividuals invest in themselves.' Commu-
nities with lots of highly educated resi-
dents tend to have higher property values,
higher average wages and more produc-
tive businesses. Educated individuals' in-
creased earnings lead them to contribute
more income, sales, payroll and property
taxes. Educated individuals are less likely
to receive welfare, Medicaid or unem-
ployment compensation. They and their
children tend to be healthier, which should
reduce their use of the public health sys-
tem. Studies suggest that their children
are less likely to live in poverty or suffer
from severe child abuse — situations that
can have grave social consequences as
well as be a drain on the public purse.
Society also benefits because educa-
tion fosters technological change and eco-
nomic growth. Education boosts worker
productivity and earnings. (For example,
the lifetime earnings of a high school
graduate are nearly twice those of a drop-
Chart 1
States' Shares of Public School Funding, 1998 -99
SOURCE: National Center for Education Statistics.
out.) Moreover, well- educated workers can
help the people and machines around
them become more productive. Educated
workers are better able to move from job
to job, which helps speed the economic
transition that occurs when older indus-
tries fade and are replaced by newer
industries. In a sense, then, education
greases the wheels of economic growth
by facilitating the churning of jobs and
industries.
Clearly, education's public benefits
are substantial and widespread. They
also spill across school district bound-
aries as children move away, taking their
education with them. One -third of U.S.
adults do not live in the state in which
they attended high school, much less the
same city or school district. To match the
benefits with the taxes, public school
finance must also spill across school dis-
trict boundaries and be handled by state
and federal as well as local governments.
A U.S. Tradition
The United States has a rich history
of public education. When the country
was established, U.S. political and social
leaders believed that a minimum level
of education was necessary to unite
people of diverse backgrounds, forge
stronger communities and maintain a
stable democracy.' As the country grew,
Percent
▪ 60 or more
Ea 50 -59
▪ 40 -49
• Less than 40
FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY NOVEMBER /DECEMBER 2001
many state constitutions contained ex-
plicit provisions for public education.
States entering the union after the Civil
War were required to make constitu-
tional provisions for the equitable provi-
sion of education, though the implemen-
tation of these provisions varied from
state to state.'
From those initial one -room school-
houses, public education in the United
States has grown into a big business,
with more than 5 million employees and
yearly spending exceeding $300 billion.
Each year, 45 million students (almost
90 percent of school -age children) col-
lect their supplies and run to catch the
bell at one of our nation's 88,000 public
schools.
Those schools are financed through
a labyrinth of federal, state and local fund-
ing formulas. On average, local govern-
ments finance 45 percent of school bud-
gets, state governments 48 percent and
the federal government 7 percent. State
governments' share varies from less than
10 percent in New Hampshire to almost
90 percent in Hawaii (Chart 1). The
patchwork of funding methods merely
hints at the vigorous debate that has
occurred as states strive to find fair and
equitable finance formulas.
Public Education, Texas Style
Like many states, Texas has a consti-
tutional commitment to public education.
The Texas Supreme Court has interpreted
the state's constitution as requiring that
"districts must have substantially equal
access to similar revenues per pupil at
similar levels of tax effort. " In response,
the Texas Legislature designed a com-
plex formula that distributes general
state revenues and property tax reve-
nues across the state.' (See the box titled
"Impact of the Texas School Finance For-
mula.")
The formula has successfully equal-
ized, in rough terms, the amount of
money any given district can raise per
student. In particular, the state guaran-
tees that each additional penny in tax
per hundred dollars of taxable property
will give the district between $24.70 and
$29.50 in additional spending per pupil.'
If the district is unable to raise at least
$24.70, the state makes up the differ-
ence. If the district is wealthy enough
that it raises more than $29.50, the state
One measure of a school finance formula
is its impact on the price taxpayers pay for
each dollar of revenue. A district's average tax
price is its local tax revenues divided by its
spending.' Districts with an average tax price
above $1 raise more money than they spend,
with the difference going to help fund state
education spending in other Texas districts.
School districts with an average tax price
below $1 spend more money than they raise,
with the difference coming from state and
federal subsidies. The lower the average tax
price, the more a district benefits from the
school finance formula.
Most Texas school districts have an
average tax price substantially below $1.
Average tax prices in 2000 -01 ranged from
2 cents in Boles ISD to just over $3 in Palo
Pinto, Sabine Pass and Kenedy County ISDs.
As the chart illustrates, average tax prices
increase with property wealth and are higher in
the Robin Hood districts than in other districts.
This is also evident in the table, which presents
average tax prices for the largest Robin Hood
and non -Robin Hood districts.
Interestingly, even Robin Hood districts
can have tax prices below $1. In 2000 -01, the
tax price for Austin ISD was 96 cents because
the district received more money from the
state and federal government than it paid to
the state to help other Texas school districts.
Average tax prices do not tell the whole
story, however. Spending from the district's
fund balance (accumulated reserves) lowers
the average tax price, while adding to the fund
balance boosts the average tax price. Accord-
ing to a district official, if spending from the
fund balance were included as local revenue,
Richardson ISD's average tax price for 2000 -01
would increase from $1.01 to $1.05.
In addition, average tax prices say little
about the formula% effect on additional
revenue a district might choose to raise.
As the district's tax base gets farther above
the guaranteed tax base, an increasing share
of local revenue must be paid to the state in
Robin Hood payments. For example, the
Grapevine- Colleyville ISD currently must
raise $1.42 for each additional dollar the
district wishes to spend.
Notes
For our measure, both revenues and expenditures exclude
bonds and are based on budget figures reported to the Texas
Education Agency.
2 Data constraints limit our ability to incorporate changes in
fund balance for all districts.
Impact of the Texas School Finance Formula
Distribution of Average Tax Price Among School Districts, 2000 -01
Average tax price
3.5 -
0
El
SOURCES: Texas Education Agency; authors' calculations.
Largest Robin Hood Districts
Highland Park (Dallas)
Eanes
Deer Park
La Porte
Carrollton- Farmers Branch
Texas City
Coppell
Grapevine- Colleyville
Plano
Brazosport
Richardson
Austin
Largest Non -Robin Hood Districts
Dallas
Arlington
North East
Houston
Cypress- Fairbanks
Northside (San Antonio)
Fort Bend
Fort Worth
Garland
El Paso
Aldine
San Antonio
Ysleta
SOURCES: Texas Education Agency; authors' calculations.
5,848
7,392
11,428
7,632
24,134
5,817
9,243
13,584
47,161
13,161
35,138
77,816
161,548
58,866
50,875
208,462
63,497
63,739
53,999
79,661
50,312
62,325
52,520
57,273
46,394
Total property value per pupil in 1999 (thousands of dollars)
2.02
1.46
1.43
1.34
1.18
1.15
1.12
1.08
1.05
1.04
1.01
.96
.79
.67
.65
.60
.60
.51
.51
.44
.43
.38
.32
.30
.22
FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY NOVEMBER /DECEMBER 2001
Robin Hood districts
B Non -Robin Hood districts
Average Tax Prices for Texas' Largest School Districts
Robin Hood payment
Enrollment Average tax price (millions of dollars)
41.1
27.3
40.9
24.8
45.0
9.6
16.6
20.0
75.3
8.5
30.4
30.8
0
0
0
0
0
0
0
0
0
0
0
0
0
requires districts in effect to give the dif-
ference to poorer districts in what have
come to be called Robin Hood payments.
Texas school finance equalization
appears to have achieved dramatic re-
sults. The proportion of economically
disadvantaged students passing all tests
on the Texas Assessment of Academic
Skills (TAAS) has increased from 39 per-
cent to 73.6 percent since the wealth -
equalization formula was implemented.'
For example, the property -poor Ysleta
Independent School District (ISD) in El
Paso raised its passing rate on the TAAS
from 47.5 percent to 84.6 percent. Simi-
larly situated, the Aldine ISD in Houston
increased its passing rate from 50.7 per-
cent to 84.1 percent. While not every
property -poor district achieved such re-
markable gains in student performance,
the evidence is clear that some districts
were able to use their newfound wealth
to give students a better education.
As poorer districts in Texas have
improved, the nation has taken notice.
A recent study by the Texas Educational
Excellence Project lauded the Texas sys-
tem for largely eliminating the impact of
school district wealth on student perform -
ance. Noted education analyst Lawrence
0. Picus called Texas' school finance law
"an excellent system of equity. " And a
representative of the National Confer-
ence of State Legislatures went so far as
to say that many states now look to the
Texas formula as a model because it is
"one of the best systems out there as far
as equity is concerned. ""
Unintended Consequences
There is little question that the Texas
school funding system has helped pro-
mote a more equitable distribution of
education across the state. In fact, the
Texas system generally follows the basic
principles of effective public finance (see
the box titled "Four Principles of Public
School Finance "). Yet there is reason to
believe that some aspects of the Texas
system are in need of revision. Several
property- wealthy districts recently chal-
lenged the constitutionality of Robin
Hood, and while the state Supreme Court
dismissed their challenge, it pointedly
did not dismiss the schools' concerns
about Robin Hood payments.
The Robin Hood portion of the sys-
tem is only a small part of the total Texas
Four Principles of Public School Finance
1. Treat equals equally.
Similar individuals should be charged the same price for basic educational services.
Several factors affect the cost of educating children, including variations in the cost of living or in
the needs of students. Finance formulas should recognize variations in these costs and direct additional
resources to high cost -of- education areas.
In addition, wide disparities in property tax base raise practical concerns about tax equity. School
districts with ample commercial, industrial or mineral property wealth can reduce the homeowner's tax
bill by taxing these sources, while residents of bedroom communities must foot the entire education bill
themselves. Residents should be able to profit from variations in property wealth that arise from local
school district policies but not variations that arise from other factors.
2. Respect local tastes.
A community that wishes to purchase a high level of education for its children should be
allowed to do so.
Some parents strongly support education and are willing to tax themselves accordingly. It is
inappropriate for the state to prevent these taxpayers from devoting extra resources to the educational
needs of their children.
3. Match benefits with taxes.
Whoever receives the benefit should pay the taxes. •
The benefits of education fall first and foremost to students and their families, and the lion's share
of education costs also fall to them. In the high schools, between one -half and two- thirds of U.S. school
resources come from the forgone earnings of students. Families also pay school taxes directly and pick
up much of the school tax burden that originates at the business level.'
The public benefits of education spill over school district boundaries. Ideally, municipal, state and
federal governments should pick up part of the tab according to how far outside the local school district
boundary the benefits of education reach.
4. Avoid unintended consequences of redistribution.
Be sure that school finance formulas preserve economic incentives.
Income redistribution can harm school efficiency by reducing local involvement in public schools.
As the local share of school finance falls, residents have less incentive to monitor school performance
because residents reap fewer rewards from such monitoring. A recent study suggests that the larger the
state share in educational finance, the less efficient the public schools.'
Redistribution can also reduce economic output by fostering public policies harmful to business.
As long as school district revenue is tied to the policies districts choose to pursue, school districts have
an incentive to choose wisely. Redistribution severs this link by sending one district's gains across an
entire state, making any particular district less likely to care about how its policies affect economic
output in its district.
Notes
Because capital must earn a comparable after -tax rate of return in all parts of the world, taxes on business capital or business income are
actually paid by the people who work for the firm or buy its products.
2 Thomas A. Husted and Lawrence W. Kenny (2000), "Evidence on the Impact of State Government on Primary and Secondary Education
and the Equity— Efficiency Trade -Off," Journal of Law and Economics, vol. 43 (April), pp. 285 -308.
educational funding system; 73 districts
paid $538 million during the 2000 -01
school year, which is less than 5 percent
of the state's $11 billion education bud-
get. However, the amount of money
raised from property- wealthy districts
rose by more than 10 percent from the
previous year and has been predicted to
rise by as much as 20 percent in the
2001 -02 school year.'Z Robin Hood pay-
ments will play an increasingly important
role in Texas school finance in coming
years. This suggests to many that the
finance formula's problems will become
increasingly severe if not corrected soon.
FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY NOVEMBER /DECEMBER 2001
There are four areas of concern. The
finance formula weakens the link between
success and funding, reduces spending
on education in some districts, doesn't
keep pace with the economy and dis-
torts educational decision - making.
Weaker Link Between Success and
Funding. The Texas school funding for-
mula gives districts less financial incen-
tive to improve their educational quality.
A city that improves itself attracts fami-
lies to the area, driving up property val-
ues and raising the amount of money
that flows into city coffers. In Texas,
increases in property value generate no
new revenue for most school districts. If
property values rise in a Robin Hood
school district, it is stripped of any addi-
tional revenue it might collect, even if
the revenue stems from the district's suc-
cessful efforts to offer a better education
to its students. If property values rise in
a property-poor district, local tax pay-
ments will increase, but any additional
revenue results in a dollar- for - dollar
decline in state aid. Thus, for most dis-
tricts, funding is unchanged regardless of
district performance.
Lower Spending on Education. Many
districts face a financial incentive to
reduce their educational expenditures.
A Texas city that wishes to spend more
on police or fire protection simply raises
its tax rate by the appropriate amount
and then spends the money. A property-
wealthy school district, however, must
give more revenue to the state if it
chooses to raise its tax rate. Taxpayers
can be understandably reluctant to sup-
port local tax increases when they result
in larger payments to the state. This dis-
courages school administrators from
suggesting increased educational expen-
ditures and discourages voters from sup-
porting such increases. For districts that
must pay money to the state, the Robin
Hood portion of the finance formula has
the same effect as a tax on education.
Furthermore, school districts are not
allowed to raise their tax rate above
$1.50 per $100 valuation for the opera-
tions portion of their budget. This cap
prevents some residents from purchasing
the higher level of public education they
desire.
Slow to Change. The static nature of
the finance formula may distribute reve-
nue in ways the Legislature did not in-
tend. Texas is one of the few states to
adjust its school finance formula to
reflect regional variations in the cost of
education. Unfortunately, the formula has
not been updated in the last decade, so
it currently distributes revenue based on
an outdated pattern of cost differentials.
For example, the cost -of- education index
treats Carroll ISD as a school district with
less than 2,000 students, even though
enrollment now tops 6,600. The finance
formula also suffers from bracket creep.
In 2000, the median home price in Texas
increased by 13 percent, but the effective
tax base for determining revenues under
the school finance formula didn't increase
at all. Districts received less state aid,
and some started making Robin Hood
payments simply because a rising eco-
nomic tide lifted their boat along with all
the others.
Distorted Decision- Malting. While
most revenue and tax sources are in-
cluded in the revenue - sharing portion of
the Texas funding formula, taxes levied
to build schools or facilities are not.
This gives affluent districts an incentive
to spend money on buildings rather than
on teachers or books because issuing
long -term debt does not increase their
Robin Hood liability to the state.
Conclusion
Texas has developed a complex
formula for disbursing and reallocating
funds to the state's 1,041 traditional
school districts. This formula helps thou-
sands of Texas children receive a better
education and has garnered national
accolades for its role in equalizing edu-
cational opportunities. However, the for-
mula has also produced unintended side
effects that likely reduce the demand for
education in some districts and lower the
incentive for some schools to improve
educational quality.
These problems do not negate the
significant benefits poor and average -
income districts reap from the Texas
funding formula. But they do suggest
opportunities to further improve the
school finance system in Texas. Mending
these frayed edges can make an already
strong educational funding system even
stronger and help the citizens of Texas
meet the challenges of the 21st century.
—Jason L. Saving
Fiona Sigalla
Lori L. Taylor
Saving and Sigalla are economists and
Taylor is a senior economist and policy
advisor in the Research Department of the
Federal Reserve Bank of Dallas.
Notes
' There is great debate over whether governments should do this by pro-
viding public schools or by offering vouchers, but this debate is
beyond the scope of this paper.
2 For a more complete discussion of the social benefits of education,
see Lori L. Taylor, The Government's Role in Primary and Secondary
Education," Federal Reserve Bank of Dallas Economic Review, First
Quarter 1999, pp. 15 -24.
5
FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY NOVEMBER /DECEMBER 2001
Andrew J. Coulson (1999), Market Education: The Unknown History
(New Brunswick, N.J.: Transaction Publishers), p. 75. It should be
noted that U.S. policymakers did not always live up to these lofty
ideals, such as the separate but equal educational system for Southern
blacks that persisted for a century after the Civil War.
David Tyack, Thomas James and Aaron Benavot (1987), Law and the
Shaping of Public Education, 1785 -1954 (Madison: University of
Wisconsin Press), pp. 20 -21.
Edgewood Independent School District v Kirby, 777 S.W. 2d 391 (Tex.
1989).
The Texas school finance formula has two major components. The first
part, "Tier 1," provides a minimum level of funding for all school dis-
tricts that levy a property tax rate of 86 cents per $100 of property val-
uation. Each district's Tier I funding is determined by adjusting a basic
allotment per pupil to reflect three factors: a cost -of- education index,
the size of the district and the presence of expensive -to- educate stu-
dents such as those with learning disabilities. The state calculates
each district's Tier I level of funding, subtracts the local share (86 cents
times the value of taxable property in the district) and makes up the dif-
ference.
The second part of the formula, "Tier H," guarantees that school
districts will raise roughly comparable revenue per pupil (adjusted
for factors such as expensive -to- educate students) for each penny
increase in their property tax rate between 86 cents and the statewide
cap of $1.50. In effect, the state guarantees that each district can
behave as if it had a tax base of at least $247,000 per weighted pupil
and no more than $295,000 per weighted pupil. (Although the law pro-
vides a guarantee of $24.99, according to the Texas Education Agency,
other costs reduced the guarantee to $24.70.)
The formula is adjusted for variations in the cost of providing educa-
tional services. For example, expensive -to- educate students (such as
those with learning disabilities) count as more than one pupil for fund-
ing purposes.
e Nearly half of Texas schoolchildren are considered economically
disadvantaged. The passing rate for all children increased from 56
percent to 82.1 percent between the 1993 -94 school year and the
2000 -01 school year.
9 Texas Educational Excellence Project (1999), "Examining the Effects of
School Finance Reform in Texas," httpJ/bush.tamu.edu/kmeier/teep/
reports.htm.
10 Jacques Steinberg (2001), "NY on a Familiar Road to School Financ-
ing Reform," Dallas Morning News, January 19, p. 10A.
11 Associated Press (2001), "Group Praises State for School Funding,"
Dallas Morning News, October 27, p. 37A.
' The number of Robin Hood contributors is expected to rise from 73 to
101 and the amount of revenue raised may be as high as $650 million
in the 2001 -02 school year.