The Untold Story of School Finance Reforms in the United States

Blog Post
June 5, 2014

In a study that should prove very important to those interested in PreK-12 public school finance, Northwestern University and UC Berkeley scholars present findings from an exhaustive and sophisticated analysis of school finance reforms since 1971. The big takeaway from the study: There is a strong positive relationship between school spending and positive student outcomes for low income districts.

Specifically, the researchers find that a student who attended a school funded at levels 20 percent greater than a peer’s would, on average, have 25 percent higher earnings and a 20 percentage point lower incidence of adult poverty. The authors also find that had low-income schools been funded at levels 20 percent higher than they were over the period studied, it would have improved the graduation rate of students in low-income schools by 23 percentage points--enough to erase the high-school completion gap between the poor and the non-poor.

That might seem obvious--spend more on the poorest schools and kids will do better--but especially in the budget-constrained, post-recession environment, there is actually quite a bit of doubt about the efficacy of spending increases. And at the extremes, it’s clear that both sides have a point. Certainly a school that had no money to spend would do really poorly for its students -- and without paid teachers it’s not totally clear it would even be a school. At the other extreme, it’s fairly easy to imagine a school with so much money it runs out of useful things to spend it on. And of course, at any point on the funding continuum, spending has to be prudent in order for it to drive better student outcomes. Spend all your money on bouncy houses instead of teacher salaries or textbooks, and that money isn’t likely to result in smarter kids. But whether spending in public schools across the recent history of the U.S. has been beneficial or wasteful is an empirical question, one that this study persuasively answers.

The researchers draw on an exhaustive dataset of district spending trends and information on individual outcomes from the Panel Study of Income Dynamics (PSID) to compare the outcomes of three different types of students across all districts throughout the country: those who graduated before any spending changes were in place, those who were already in school when reforms were implemented, and those who started school only after the reforms were enacted. Then, controlling for a robust set of other factors, the researchers compare the outcomes of the three groups to examine whether different levels of exposure to spending reforms led to better student outcomes.

Ultimately, the researchers found, the magnitude of the effects depended on how long a poor student was in school after a reform was instituted. That suggests that this effect isn’t just a correlation, but that the spending increases actually caused improved outcomes.

Beyond its important empirical findings, though, the paper also serves as a useful history of school finance reforms in the last 40 years. Though the study laudably takes pains to include every type of reform that states have undergone, from legislated to court-mandated, it tells the story of U.S. public school finance with considerable emphasis on the role of state courts. In the many remembrances and analyses of the 60th anniversary of Brown v. Board of Education of Topeka, Kansas, one thing often lost in the debate is the degree to which litigation continues to shape the educational landscape, albeit in a less noticed way. As the authors explain, the success of desegregation cases throughout the 1960s led to a series of unsuccessful attempts to remedy inequitable school funding plans by having them declared unconstitutional on equal protection grounds.

Unbowed by these failures, though, two more waves of state level litigation were much more successful. The first wave, occurring between 1970 and 1988, focused its arguments on questions of equity; that is, they argued predominantly for the equal distribution of school spending. The second wave, defined as the 1990s through 2010 for the purposes of this study, focused much more on the adequacy of funding, and sought to compel states to deliver on their state constitutions’ promises to provide a quality education to all students. Helpfully, the authors trace the number of these cases in a graph:

EquityAdequacyGraphOver the last four decades, many states have been party to these cases--and the shift toward adequacy-based, rather than equity-driven, arguments in the later years is clear. In fact, these cases continue to shape the education finance landscape today. Just this past March, the Kansas Supreme Court ruled that the state’s funding formula had violated the state’s constitution on equity grounds, and directed the district court to reconsider whether there had been a violation on adequacy grounds as well. And the ramifications of a 2012 State Supreme Court decision in Washington state are continuing to shape the education system there.

Also important for policy purposes, though, are the types of funding reforms that have  resulted from both the court cases and legislative action. The authors divide these reforms into five categories and trace the influence on spending of each, except flat grants, which are excluded for methodological reasons. The five types of reform are:

  • Foundation plans, which set a basic floor for spending below which districts cannot fall;
  • Flat grants, which allocate funding based only on the number of students enrolled;
  • Equalization plans, which distribute funds based on income or wealth, with greater funding available to high-poverty schools;
  • Reward-for-effort plans, which incent local spending through matching grants; and
  • Spending limits, which limit the amount any district can spend.
The prominence of each type of reform has shifted over time, as the graph below demonstrates. Today, most states have a foundation plan, and more than half of states include an equalization plan. (There is overlap in the formula types for some states.)

Formula Types

As for the effects of these plans on spending, the authors find that both foundation and equalization plans--the two most popular plans--result in higher spending for low-income districts and only mildly, if at all, higher spending for high-income ones, thus helping to close the funding gap between the two. Reward-for-effort plans, which try to encourage districts’ spending, produce-- not surprisingly--similar, significant increases in spending for both low- and high-income districts in the first five years following reform, and only modest evidence for a much longer-term increase in spending for low-income districts. Finally, the approach of setting spending limits, although successful in reducing inequalities, also reduced spending overall in the long term, even among low-income districts.

In all, the study provides considerable evidence that the school-finance reforms of the last four decades, including the many court-mandated reforms, have had an important equalizing effect on school spending. And given that this seems to have been achieved largely through increases in spending for low-income schools, the findings here suggest that low-income students have received a considerable boost compared to what they would have experienced without the changes.