Public Education Funding: Foundation System vs. Power-Equalizing System with Property Taxes
Abstract: The existing literature on public education finance suggests that a Power- Equalizing system would be chosen over a Foundation system because a majority of households benefit from larger redistribution. Recently, however, several states have been implementing school finance reforms towards a Foundation system. This paper analyzes the welfare effects of such reforms by using a public education finance model including a housing market. Housing market decisions play an important role in public education finance as property tax revenues constitute a big part of public education expenditures. With the introduction of a housing market into the model, property tax rates are higher under a Power-Equalizing system compared to a Foundation system. This results in lower housing prices and housing wealth in the Power-Equalizing system. Due to this housing market effect, it might be that a Foundation system would be chosen over a Power-Equalizing system even though the majority of school districts benefit from higher redistribution of funds under a Power-Equalizing system. The model suggests that a lower mean income and/or lower income inequality in a state results in a Foundation system being chosen by a majority. We provide suggestive evidence supporting these theoretical results. By comparing the growth rate of per capita income and Gini coefficient of the states that changed their public education finance system with various reference groups, we find that these switches can be rationalized through the lens of our model.
States Involvement in Public Education Finance: Crowding-out Effect
Abstract: This paper analyzes the effects of increased levels of state involvement in public education finance in the U.S.. By using district level data on K-12 public education finance, income and demographic composition in 2008, I conclude that state governments redistribute from wealthier districts to poorer districts. Local authorities, however, respond to the centralization of public education finance systems by decreasing their contributions. Thus, every dollar increase in state aid increases total expenditures by less than one dollar. Using the categorization of Jackson et al. (2014), I argue that the effect of state funds on total expenditures is different for different state aid formula types. In states with standard equalization plans and local effort equalization plans a dollar increase in state aid increases total expenditures by as little as 35 cents. In states with minimum foundation plans, in contrast, a dollar increase in state aid increases total expenditures per pupil by as much as 70 to 83 cents. Moreover, spending limit in state aid formulas decrease the crowding-out rate. Giving fixed grants to school districts, on the other hand, had little effect on crowding-out rates.
Demographics and Public School Expenditures
Abstract: In this paper, I explore the underlying demographic factors that lead into a stronger preference for public education. Previous studies suggest that lower share of elderly, higher share of school age children, and higher share of college graduates in the population result in a higher level of spending per pupil in public schools. However, the existing literature does not take into account the differences in state aid formulae. This is important given that these formulae differ and they have direct effects on levels and dispersion of spending in the districts. My analysis
suggests that the type of state aid formula affects the relationship between demographic characteristics and spending per pupil in public schools. Specifically, the effects of these three variables on public education expenditures are bigger in the states with Minimum Foundation plans compared to Equalization and Local Equalization plans. This is a direct result of the latter two state aid formulae being more centralized compared to Minimum Equalization plans. While they control for spending inequality at a higher degree, public education finance system in the state becomes more centralized which leads into a weaker relationship between each of these demographic variables and spending levels in the districts. These results are also seem to be robust to the type of the public education finance reform of the state.
Abstract: The existing literature on public education finance suggests that a Power- Equalizing system would be chosen over a Foundation system because a majority of households benefit from larger redistribution. Recently, however, several states have been implementing school finance reforms towards a Foundation system. This paper analyzes the welfare effects of such reforms by using a public education finance model including a housing market. Housing market decisions play an important role in public education finance as property tax revenues constitute a big part of public education expenditures. With the introduction of a housing market into the model, property tax rates are higher under a Power-Equalizing system compared to a Foundation system. This results in lower housing prices and housing wealth in the Power-Equalizing system. Due to this housing market effect, it might be that a Foundation system would be chosen over a Power-Equalizing system even though the majority of school districts benefit from higher redistribution of funds under a Power-Equalizing system. The model suggests that a lower mean income and/or lower income inequality in a state results in a Foundation system being chosen by a majority. We provide suggestive evidence supporting these theoretical results. By comparing the growth rate of per capita income and Gini coefficient of the states that changed their public education finance system with various reference groups, we find that these switches can be rationalized through the lens of our model.
States Involvement in Public Education Finance: Crowding-out Effect
Abstract: This paper analyzes the effects of increased levels of state involvement in public education finance in the U.S.. By using district level data on K-12 public education finance, income and demographic composition in 2008, I conclude that state governments redistribute from wealthier districts to poorer districts. Local authorities, however, respond to the centralization of public education finance systems by decreasing their contributions. Thus, every dollar increase in state aid increases total expenditures by less than one dollar. Using the categorization of Jackson et al. (2014), I argue that the effect of state funds on total expenditures is different for different state aid formula types. In states with standard equalization plans and local effort equalization plans a dollar increase in state aid increases total expenditures by as little as 35 cents. In states with minimum foundation plans, in contrast, a dollar increase in state aid increases total expenditures per pupil by as much as 70 to 83 cents. Moreover, spending limit in state aid formulas decrease the crowding-out rate. Giving fixed grants to school districts, on the other hand, had little effect on crowding-out rates.
Demographics and Public School Expenditures
Abstract: In this paper, I explore the underlying demographic factors that lead into a stronger preference for public education. Previous studies suggest that lower share of elderly, higher share of school age children, and higher share of college graduates in the population result in a higher level of spending per pupil in public schools. However, the existing literature does not take into account the differences in state aid formulae. This is important given that these formulae differ and they have direct effects on levels and dispersion of spending in the districts. My analysis
suggests that the type of state aid formula affects the relationship between demographic characteristics and spending per pupil in public schools. Specifically, the effects of these three variables on public education expenditures are bigger in the states with Minimum Foundation plans compared to Equalization and Local Equalization plans. This is a direct result of the latter two state aid formulae being more centralized compared to Minimum Equalization plans. While they control for spending inequality at a higher degree, public education finance system in the state becomes more centralized which leads into a weaker relationship between each of these demographic variables and spending levels in the districts. These results are also seem to be robust to the type of the public education finance reform of the state.