School Finance: Three States' Experiences with Equity in School Funding
(Letter Report, 12/19/95, GAO/HEHS-96-39).

Pursuant to a congressional request, GAO reviewed the experiences of
three states that reformed their school finance systems, focusing on
the: (1) reforms made to each school finance system; (2) legal,
budgetary, and political pressures that their state legislatures faced
in making the finance reforms; and (3) impact of the legislative
remedies in addressing educational funding disparities.

GAO found that: (1) lawsuits prompted each state to address the
education funding disparities within its district; (2) the legislative
solutions in all three states helped poor districts without harming the
educational programs of wealthy districts and were sensitive to public
sentiments concerning property taxes; and (3) other states undergoing
similar education finance reforms should define the equity goals of
their school finance systems in terms of the funding needed to achieve a
certain level of student performance, link funding reform with greater
accountability for student performance, and encourage all groups
affected by education finance reform to participate in the
decision-making process.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-96-39
     TITLE:  School Finance: Three States' Experiences with Equity in 
             School Funding
      DATE:  12/19/95
   SUBJECT:  Intergovernmental fiscal relations
             State/local relations
             Litigation
             Property taxes
             Public schools
             Financial management systems
             Students
             Judicial remedies
IDENTIFIER:  Texas
             Minnesota
             Tennessee
             
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Cover
================================================================ COVER


Report to Congressional Requesters

December 1995

SCHOOL FINANCE - THREE STATES'
EXPERIENCES WITH EQUITY IN SCHOOL
FUNDING

GAO/HEHS-96-39

States' Equity Experiences

(104814)


Abbreviations
=============================================================== ABBREV

  CPRE - Consortium for Policy Research in Education
  SB - Senate Bill

Letter
=============================================================== LETTER


B-261604

December 19, 1995

The Honorable Jeff Bingaman
The Honorable Christopher Dodd
The Honorable Paul Simon
United States Senate

Since the 1960s, the federal government has targeted educational
funds to areas of greatest need.  For example, we commented on
federal efforts to award Elementary and Secondary Education Act
grants to localities with the greatest need.\1 More recently, the
federal government has also encouraged states and localities to
develop high academic standards for all school-age children.  The
system used to finance local schools within each state can affect
whether students in all districts can realistically achieve such
standards.  In most states, these systems rely heavily on local
property wealth, which can vary greatly from district to district. 

Since about 1989, more than half of the states have been involved in
lawsuits alleging that disparate access to education revenues
violates the state's responsibility to provide for the education of
all students.  As a result, many state legislatures have modified
their school finance systems. 

To better understand state school finance issues, you asked us to
review the experiences of selected states that had recently reformed
their school finance systems to make them more equitable. 
Specifically, for each state selected, you asked us to characterize
(1) the reforms to the school finance systems and the legal,
budgetary, and political pressures the state legislature faced in
making the revisions and (2) the general impact of the legislative
remedy, especially in addressing disparities in educational funding. 
You also asked us to determine what advice state officials could
provide for other states similarly reforming their school finance
systems. 

To answer these questions, we conducted case studies of three
states--Tennessee, Texas, and Minnesota.  (See app.  I for a detailed
discussion of methodology.) In selecting which states to study, we
first asked experts in education finance to identify states that had
implemented finance equity reforms.  Then, for each state identified,
we contacted state education officials or reviewed materials relevant
to the state's school finance system to obtain information on finance
formulas; school finance legislation; revenue-raising strategies; and
limitations, if any, on discretionary spending on local districts. 
We also considered each state's demographic makeup, reviewing such
factors as the concentration of poverty and public school enrollment
and growth rates.  We selected Tennessee, Minnesota, and Texas for
in-depth review because they had recently reformed their school
finance systems and differed substantially from each other in (1) the
approaches taken to revise their finance systems and (2) such
demographic factors as poverty and student enrollment rates. 
Analyzing the school finance systems in three states with such broad
variation increases the likelihood that findings common to all three
states would be relevant to others trying to make their school
finance systems more equitable.  For each state selected, we reviewed
school finance documents and analyzed data on state budgets, student
demographics, and school district funding levels.  We also
interviewed a variety of education officials, about 15 in each state,
including legislators, state finance and education officials, and
representatives from statewide education associations (see app.  II
for a list of the titles of the interviewed officials).  We conducted
our study between April and October 1995 in accordance with generally
accepted government auditing standards. 


--------------------
\1 See Title I Formula in S.  1513 (GAO/HEHS-94-190R, June 7, 1994)
and Remedial Education:  Modifying Chapter 1 Formula Would Target
More Funds to Those Most in Need (GAO/HRD-92-16, July 28, 1992). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Just as the federal government has targeted grants to localities with
the greatest need, some states have been taking steps toward making
school funding more equitable among districts, often as a result of
court-imposed decisions.  In the three states we studied, lawsuits
led each state to address disparities in education funding among
districts.  Texas had $14 million in taxable property wealth per
pupil in its wealthiest district, while the least wealthy district
only had $20,000 in taxable property wealth per pupil.  As a result
of court action, Texas took a number of actions.  For example, they
limited taxable property wealth per pupil to $280,000. 

Legislative solutions following legal challenges in all three states
lessened disparities; they also helped poor districts without harming
the education programs in wealthy districts.  For example, Minnesota
increased the funds available to low-property wealth districts and
limited the local contributions districts could make.  However,
provisions in Minnesota's school finance reform legislation allowed
some wealthy districts to keep what they had at the time of the
legislation, even if it exceeded the new limits.  Solutions in all
three states were also sensitive to public sentiments about taxes. 
To build support for a sales tax increase to fund school finance
reform, for example, Tennessee included accountability provisions in
its legislation to ensure that any increase in spending would be used
to improve student learning.  Tennessee's small rural districts now
have art and music teachers and can offer courses that will better
prepare their students for college. 

All three states, however, have crafted solutions that may be subject
to change.  In Texas, for example, the current solution includes a
state-imposed ceiling on property tax rates.  This may make it
difficult for some districts to raise sufficient revenue for
burgeoning populations of educationally disadvantaged children, who
characteristically cost more to educate.  In another example,
Tennessee's original solution to funding disparities--which
specifically excluded teacher salaries as an allowable expense for
the purpose of equalization--proved unsatisfactory to 77 small and
rural districts.  They felt that not being able to spend the money on
increases in teacher salaries made it difficult for them to attract
and retain teachers.  Their lawsuit forced the 1995 legislature to
include increases in teacher salaries in the school finance plan, so
far costing the state $7 million. 

Officials' advice to other states undertaking similar reforms
centered on (1) clearly defining the equity goals of the school
finance system in terms of the funding needed to either provide
adequate educational resources for all students or to achieve a
certain level of student performance, (2) linking funding reform with
greater accountability for student performance, and (3) encouraging
all groups affected by education finance reform to participate in
making the decisions. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Financing elementary and secondary education requires a large amount
of money; in school year 1993-94, total expenditures in all U.S. 
elementary and secondary schools totaled an estimated $285 billion.\2
In most of the 50 states, education is the largest single expenditure
category in the state budget, accounting for 20.3 percent of total
state spending in fiscal year 1994.  Elementary and secondary schools
receive most of their funds from state and local revenues.  Federal
aid has mainly focused on providing services to educationally
disadvantaged children through categorical, program-specific grants. 
In school year 1992-93, state and local shares of education spending
were almost equally divided at 45.6 percent (or $113 billion) and
47.4 percent (or $118 billion), respectively, while the federal share
was 6.9 percent (or $17 billion). 


--------------------
\2 Includes public and private elementary and secondary schools.  For
more information on education spending, see School Finance:  Trends
in U.S.  Education Spending (GAO/HEHS-95-235, Sept.  15, 1995). 


      FUNDING DISPARITIES HAVE LED
      TO COURT CHALLENGES OF MANY
      STATE SCHOOL FINANCE SYSTEMS
---------------------------------------------------------- Letter :2.1

Disparities in the distribution of education funds can occur because
of the method that states use to finance their public elementary and
secondary schools.  In most states, localities provide a major share
of school funding, which is generally raised through the property tax
(see table 1 for the funding sources in the states we analyzed). 
Because property wealth is not equally distributed among school
districts, however, the heavy reliance on the local property tax
produces disparities in districts' ability to raise education
revenues. 



                          Table 1
          
           1994 Sources of Public Elementary and
            Secondary School Education Revenues

                State revenue         Local revenue
                sources               sources
--------------  --------------------  --------------------
Minnesota       Income tax            Property tax
                Sales tax
                Motor vehicle excise
                tax
                Corporate tax
                Tobacco and alcohol
                taxes
                Other miscellaneous
                taxes

Tennessee       Sales and use tax     Property tax
                Taxes on tobacco and  Optional sales tax
                mixed drinks
                General fund
                revenues from a
                broad range of
                licenses, fees, and
                other sources

Texas           Sales tax             Property tax
                Corporate franchise
                taxes
                Oil and gas
                production taxes
                Tobacco and alcohol
                taxes
                Lottery proceeds
                Interest and
                dividends
                Educational
                endowment fund
----------------------------------------------------------
Since the early 1970s, these disparities have led poor districts in
more than 40 states to challenge the constitutionality of their
state's school finance system.  More than half of the state systems
have been challenged since 1989--some for the second time.  In most
cases less wealthy districts charge that the state school finance
system violated the state's constitution under one or two
provisions--the education clause or the equal protection clause. 


         ROLE OF EDUCATION CLAUSE
         OR EQUAL PROTECTION
         CLAUSE IN LAWSUITS
-------------------------------------------------------- Letter :2.1.1

All states have an education clause or some provision in their
constitution that requires the creation of a public school system. 
These clauses vary--some simply call for the creation of an education
system, and others call for such systems to be, for example,
"thorough and efficient" or "general and uniform." The courts in each
state must interpret the substantive meaning of such clauses, on the
basis of their wording and principles of statutory interpretation. 

Equal protection clauses in state constitutions require that all
individuals in similar situations be treated similarly.  A suit
brought under this provision must allege that an individual is being
classified, or treated differently, by the state.  In invoking the
equal protection clause, claimants may, for example allege that the
state discriminated against low-property wealth districts in
providing education funds.  In states where the highest court has
found public education to be a fundamental state right, a standard of
strict scrutiny applies.  For a school finance statute to meet the
standard of strict scrutiny, the court must be satisfied that a
compelling government interest is at stake, a less discriminatory
method to meet it does not exist, and the classification in the
legislation is necessary to achieve a compelling government interest. 


      A FRAMEWORK FOR SCHOOL
      FINANCE EQUITY
---------------------------------------------------------- Letter :2.2

Determining the equity of a state's school finance system, according
to school finance experts, requires policymakers to consider the
following four issues.  First, policymakers must decide who is to
benefit from an equitable school finance system, taxpayers or public
school students.  Second, the object that is to be equitably
distributed must be determined.  These objects include educational
revenues or key educational resources, such as curriculum and
instruction, or outcomes, such as student achievement.  Third, the
principle to be used to determine whether the distribution is
equitable must be chosen.  School finance experts have identified
four principles for defining equity:  (1) horizontal equity, in which
all members of the group are considered equal; (2) vertical equity,
in which legitimate differences in resource distributions among
members of the group are recognized--for example, given childrens'
differences, some students deserve or need more educational services
than others; (3) equal opportunity, also known as fiscal neutrality,
which means that differences in expenditures per pupil cannot be
related to local school district wealth; and (4) effectiveness, which
assesses the degree to which resources are used in ways that research
has shown to be effective.  The effectiveness principle suggests that
a resource inequity exists not only when insufficient resources are
available but also when resources are not used in ways that produce
desired impacts on student performance.  The fourth issue, according
to experts, is to determine what statistic will be used to measure
the degree of equity in the school finance system.  Many statistical
measures exist for this purpose; one such measure is the federal
range ratio.\3


--------------------
\3 The federal range ratio is the difference between the values of
the observations at the 95th percentile and the 5th percentile,
divided by the value at the 5th percentile.  In percentage terms, the
ratio indicates how much larger the observation at the 95th
percentile is than the observation at the 5th percentile. 


      RELATIONSHIP BETWEEN
      SPENDING AND STUDENT
      PERFORMANCE UNCLEAR
---------------------------------------------------------- Letter :2.3

Using the effectiveness principle to define equity requires knowledge
of the use of education dollars to achieve certain desired student
outcomes.  However, the relationship among money, quality, and
student achievement is not well understood.\4 As a result, school
finance experts report that resources are not always used in ways
that strengthen teaching and learning.  As an expert with the
Education Commission of the States recently suggested, better
information is needed about what resources are necessary to create
successful schools, what programs and services are valuable
investments, and which ones result in the biggest payoff for
students.\5


--------------------
\4 For an example of a study that found no relationship between
education resources and student performance, see E.A.  Hanushek, "The
Impact of Differential Expenditures on School Performance,"
Educational Researcher, Vol.  18, No.  4 (1989), pp.  45-51.  For an
example of a study that found a positive relationship between such
variables, see R.D.  Laine, R.  Greenwald, and L.V.  Hedges, "Does
Money Matter?  A Meta-Analysis of Studies of the Effects of
Differential School Inputs on Student Outcomes," Educational
Researcher, Vol.  23, No.  3 (1994), pp.  5-14. 

\5 M.  Fulton, "School Finance Must Support Education Reform," State
Education Leader, Vol.  13, No.  2 (1994), pp.  1-3. 


   LAWSUITS SPURRED CHANGES
------------------------------------------------------------ Letter :3

All three states that we reviewed revised their school finance system
at least partly in response to lawsuits, although the suits' outcomes
differed initially.  In each state, less wealthy districts filed suit
claiming that disparities in the districts' access to education
revenues violated the state constitution.\6 In Tennessee and Texas,
the state supreme courts declared the school finance systems
unconstitutional; in Minnesota, the state supreme court upheld the
system because the disparities in revenue did not preclude the
plaintiff districts from providing an education that met the state's
basic requirements.\7 Nonetheless, the Minnesota State Legislature
changed the system. 


--------------------
\6 Appendixes III through V provide a more detailed summary of school
finance reform in each of the three states, including a discussion of
the court cases. 

\7 At issue in the lawsuit challenging Minnesota's school finance
system was the equity associated with only 7 percent of the general
education revenue available for elementary and secondary schools. 


      LAWSUITS FOCUSED ON
      DISPARITIES IN ACCESS TO
      REVENUES
---------------------------------------------------------- Letter :3.1

The lawsuits in all three states focused on disparities in access to
revenues.  The greatest such disparity was in Texas, where the most
wealthy district had $14 million in taxable property wealth per
pupil, and the least wealthy district had $20,000 per pupil.  Revenue
disparities between the wealthiest and least wealthy districts were
not necessarily due to the unwillingness of less wealthy localities
to tax themselves.\8 In Minnesota, for example, the plaintiffs'
attorney said that the plaintiffs' analysis showed that the
wealthiest 10 percent of districts in 1989 raised on average six
times more revenue through a levy program than the poorest 10 percent
even though tax rates for the poorest districts were on average 25
percent higher. 

In Tennessee and Texas, the courts found that the differences in
taxable wealth among districts created disparities in spending per
pupil, which in turn led to such disparities in educational
opportunities that some districts could not meet the state's basic
education course requirements.\9 For example, in Tennessee, the
disparity in total current funds available per pupil in 1987 (1 year
before the lawsuit) meant that some districts spent more than twice
as much as others--$1,823 per pupil compared with $3,669 per pupil. 
The disparity in funding, the Tennessee court concluded, deprived
students in the plaintiff schools of equal access to adequate
educational opportunities such as laboratory facilities; computers;
current textbooks; buildings; and music, art, and foreign language
courses.\10

Only one court of the three--the Tennessee Supreme Court--linked
inadequate funding of the plaintiff schools and educational outcomes. 
When the Tennessee suit was filed, only 7 percent of the elementary
schools and 40 percent of the secondary schools in the state's 10
poorest districts were accredited by the Southern Association of
Colleges and Schools, compared with 66 percent and 77 percent,
respectively, of the 10 richest districts.  Students in the plaintiff
schools, the court observed, had poor standardized test results and a
higher need for remedial courses in college. 


--------------------
\8 School districts have taxing authority in Minnesota and Texas;
counties and cities have such authority in Tennessee. 

\9 Such disparities were not an issue in Minnesota, where the
plaintiff districts stipulated that their district schools met the
state's basic education requirements. 

\10 See also School Facilities:  America's Schools Not Designed or
Equipped for 21st Century (GAO/HEHS-95-95, Apr.  4, 1995). 


      COURSE OF LAWSUITS VARIED
      AMONG STATES
---------------------------------------------------------- Letter :3.2

In Texas and Tennessee, the state supreme courts initially found the
states' school financing systems unconstitutional; subsequent
legislative action led the state supreme courts to eventually uphold
the revised finance systems as constitutional.  Before the Minnesota
Supreme Court's finding the school finance system constitutional, the
legislature had already made further changes to equalize more of the
state education revenue.  (See table 2.)



                          Table 2
          
           Key Characteristics of State Lawsuits

Year           Year of  State supreme court decision on
lawsuit          court  the constitutionality of the
filed         decision  school finance system
----------  ----------  ----------------------------------
Minnesota
----------------------------------------------------------
1988              1993  Constitutional--complete funding
                         equalization was not required,
                         and permitting wealthy districts
                         to augment revenues did not
                         violate equal protection
                         requirements.

Tennessee
----------------------------------------------------------
1988              1993  Unconstitutional--the state failed
                         to provide substantially equal
                         education opportunities.
                  1995
                         Constitutional--equalization may
                         happen over several years, but
                         equalizing or increasing teacher
                         salaries should be part of plan.

Texas
----------------------------------------------------------
1984              1989  Unconstitutional--the
                         concentration of funding
                         resources--property wealth--
                         violated the constitution.
                  1991
                         Unconstitutional--legislative
                         remedy failed to change the
                  1992   structure of the funding system.

                         Unconstitutional--legislative
                         remedy violated the state
                  1995   constitution to not impose a
                         statewide property tax.

                         Constitutional--legislative
                         remedy changed funding system
                         from one based on property wealth
                         to one based on tax effort.
----------------------------------------------------------
Regarding the two states whose systems the courts found
unconstitutional, the Texas court's judgment was more prescriptive: 
It called for districts to have substantially equal access to similar
revenue per pupil at similar levels of tax effort.  This ruling
followed the court's finding that a concentration of resources in
very wealthy districts taxing at low rates should not exist while
less wealthy districts taxing at high rates cannot generate enough
revenue to meet even minimum educational standards.  Holding that the
state's school financing system violated a provision of the state
constitution requiring educational efficiency, the court concluded
that districts must have substantially equal access to similar
revenue for similar levels of tax effort--regardless of property
wealth.  The Tennessee court found that the school finance system
failed to provide substantially equal educational opportunities to
all students, leaving it to the legislature to devise a remedy. 


   LEGISLATIVE REMEDIES SOUGHT TO
   LESSEN REVENUE DISPARITIES
------------------------------------------------------------ Letter :4

The remedies developed by the legislatures used one or more of the
following options:  (1) added new money to the school finance system
to increase funding in poorer districts ("leveled up"), (2)
redistributed the available resources by modifying the school finance
formulas, (3) limited the local revenues in very wealthy districts
("leveled down"), or (4) recaptured local revenue from wealthy
districts and redistributed it to poor districts.  Each state
approached crafting its solution differently (see table 3 and apps. 
III, IV, and V). 



                          Table 3
          
                Remedies Differ Among States

Remedy                     Texas     Tennessee   Minnesota
----------------------  --------  ------------  ----------
Raised new revenue to                        X
 increase funding in
 poorer districts
Redistributed the              X             X           X
 available resources
 by modifying the
 school finance
 formula
Limited the ability of         X                         X
 districts to raise
 local funding
Transferred local              X
 revenue from wealthy
 districts to poor
 districts
----------------------------------------------------------
Note:  This table is based on the legislative remedies found to be
constitutional by state supreme courts. 


      TENNESSEE RAISED NEW
      REVENUES AND INITIATED NEW
      SCHOOL FINANCE PLAN
---------------------------------------------------------- Letter :4.1

Of the three states in our study, only Tennessee raised new revenues
to improve access to revenues (leveled up), without placing limits on
local contributions to education.  Tennessee also revised its funding
formulas by enacting a new school finance program in 1992.  The
program funded local school districts on the basis of the cost of
providing a basic education\11 and determined the local share of this
cost on the basis of a locality's fiscal capacity.\12 To finance the
estimated $665 million needed to fund this program, the Tennessee
State Legislature passed a half-cent increase in its state sales tax
and earmarked the new revenues for education.  Under this program,
every district received more funding per pupil than it would have
under the old system, with less wealthy districts, as measured by
their fiscal capacity, receiving proportionately more than wealthy
districts. 


--------------------
\11 Tennessee has determined that the essential components needed for
a basic education include teachers for regular education, special
education, and vocational programs; support staff, such as
principals, librarians, counselors, and social workers; classroom
items, such as textbooks, instructional materials, and technologies;
and nonclassroom support associated with central office functions,
pupil transportation, plant operation and maintenance, and capital
outlay. 

\12 Tennessee uses a regression model to estimate the fiscal capacity
of counties.  Factors in the model that determine local fiscal
capacity include tax base, ability to pay, resident tax burden, and
student population.  In counties with more than one school district,
each school district pays as much of its total basic education costs
as the county is required to pay of its total costs for basic
education. 


      TEXAS AND MINNESOTA
      REDISTRIBUTED STATE FUNDS
      AND LIMITED LOCAL REVENUES
---------------------------------------------------------- Letter :4.2

Texas and Minnesota redistributed state funds by changing the funding
criteria in state aid formulas to favor low property wealth
districts--without raising new state revenues.  For example, Texas
agreed to provide additional state aid to those districts whose per
pupil property wealth was below $205,500\13 and who were willing to
raise their property tax rate above the minimum required--$.86 per
$100 of property value--up to a maximum of $1.50 per $100 of property
value.  Similarly, Minnesota chose to increase its aid to districts
with low property wealth by agreeing to equalize a portion of the
amount that districts raised through their optional operations
levy.\14

Furthermore, both Texas and Minnesota chose to limit local
contributions (leveled down).  In Minnesota, one education finance
committee legislator said that the limit placed on levy revenue was
as much a response to tax relief demands as it was an equalizing
measure.  In Texas, however, where property wealth of districts
varied greatly, legislators set limits to meet the court mandate of
"substantially equal access to similar revenue per pupil at similar
levels of tax effort." The state could not afford to close the
disparity in access to revenues by leveling up the revenue in less
wealthy districts.  The state, therefore, limited local contributions
in two ways.  First, the legislature limited the amount of revenue
available to districts by "capping" the property tax rate at which
localities could tax themselves.  Second, the state chose to limit
the taxable property value available per pupil to $280,000. 
Districts whose per pupil property values exceeded this threshold
could choose one of five options to reduce their taxable wealth
(recapture provision).  Very wealthy districts generally chose one of
two options to reduce their taxable wealth--writing a check to the
state or to a less wealthy district. 


--------------------
\13 In 1995, the Texas State Legislature increased the per pupil
property wealth ceiling from $205,500 to $210,000. 

\14 The amount equalized is equal to 10 percent of the entitlement
per pupil guaranteed by the state. 


   REFORMS REFLECTED MANY
   PRESSURES
------------------------------------------------------------ Letter :5

The legislative reforms had to account for budgetary and political
pressures.  Budget pressures were related to competing demands of
other budget sectors and to the growing student populations with
special needs.  The political pressures were related to concerns
about the reforms' impact on taxes, the funding levels of
high-spending districts, and maintaining local control of schools. 
In response to such pressures, legislatures in each state included
hold-harmless and win-win provisions. 


      MEDICAID, CORRECTIONS, AND
      GROWING POPULATIONS OF
      SPECIAL NEEDS STUDENTS
      EXERTED BUDGET PRESSURES
---------------------------------------------------------- Letter :5.1

Legislators had to negotiate changes to state finance systems in a
fiscal environment in which education and other costs were growing
rapidly.  On the basis of our analysis of state budget data, we found
that Medicaid and corrections expenditures in all three states had
grown substantially in the years before and during education finance
reform.  Medicaid spending had more than doubled in each state during
that period.  Although corrections spending had increased in all
states, Texas' corrections spending increased most dramatically--by
135 percent from 1991 to 1995.  We also found that these three states
had similar education-related budget pressures from growing
populations of special needs students, such as those requiring
remedial and bilingual programs and those with disabilities, who are
traditionally more expensive to serve. 


      CONCERNS ABOUT TAXES,
      FUNDING LEVELS, AND LOCAL
      CONTROL OF SCHOOLS EXERTED
      POLITICAL PRESSURES
---------------------------------------------------------- Letter :5.2

Other pressures were essentially political, reflecting the public's
antitax sentiments and concerns for local education programs and for
local control. 


         SOLUTIONS REFLECTED TAX
         CONCERNS OF PUBLIC
-------------------------------------------------------- Letter :5.2.1

In all three states, the reform process reflected the public's
antitax sentiment, which precluded some proposed solutions.  For
example, in Tennessee, attempts to increase revenues for schools by
implementing a first-time, broadly based income tax were defeated. 
Likewise, a statewide property tax in Texas was defeated.  The
solutions that were adopted also reflected antitax sentiments.  To
build the business community's support for a half-penny increase in
Tennessee's sales tax to fund finance and other education reform, for
example, the legislature included accountability measures ensuring
that the new money would be used to purchase resources deemed
important to improving education.  Minnesota legislators limited the
amount of per pupil revenue raised through a levy program based on
property tax to be more fair to property owners as well as to limit
(level down) local spending on education. 


         WIN-WIN SOLUTIONS WERE
         CRAFTED FOR WEALTHY AND
         LESS WEALTHY DISTRICTS
-------------------------------------------------------- Letter :5.2.2

Legislators had to respond to concerns from wealthy districts that
sudden reductions or limitations in revenue would unfairly harm their
education programs.  As a consequence, Texas and Minnesota allowed
hold-harmless exceptions in some wealthy districts either temporarily
or permanently.  These exceptions allowed districts to retain their
educational revenues (Minnesota) or keep spending levels at existing
levels by raising taxes (Texas).  Similarly, a Tennessee legislator
said that to build support for passage of the new school finance law,
it was important to show that all districts would benefit from the
new financing scheme. 


         STATE-IMPOSED SOLUTIONS
         MAINTAINED LOCAL CONTROL
-------------------------------------------------------- Letter :5.2.3

Local control was another major concern to legislators in two states. 
In Texas, consolidating tax bases among districts to facilitate
sharing property tax revenues was vehemently opposed by those whose
community identity was closely linked to district boundaries. 
Instead of requiring tax base consolidation, the legislature
ultimately encouraged it as one of five options available to wealthy
districts for redistributing their excess wealth.  Allowing for local
control of spending was also important in Tennessee, where the new
school finance plan provided much more flexibility in spending
compared with the old. 


   REFORMS IMPROVED EQUITY IN
   EDUCATION FUNDING AND
   OPPORTUNITIES
------------------------------------------------------------ Letter :6

Officials we interviewed reported that reforms to school finance
systems have improved equity for less wealthy districts in terms of
access to revenues, per pupil spending levels, or educational
opportunities.  Further, state education finance reports and our
analyses of district spending data support their conclusion. 

Officials in all three states reported improved access to revenues in
less wealthy districts.  We analyzed Minnesota state school spending
data and found the following to support this view:  in 1988, a less
wealthy district generated expenditures of $59.57 per pupil for every
percent of tax levied, compared with $84.98 per pupil for every
percent of tax levied in a wealthy district.  By 1992-93, however,
the per pupil expenditures for every percent tax levied were
essentially equal in less wealthy and wealthy districts.\15 In Texas,
where the goal was to improve access to revenues by decoupling a
district's education revenue from its property wealth, a legislative
analysis\16 showed that tax effort rather than property wealth now
explains the greatest amount of variance in a district's ability to
raise revenues.  In 1989, property wealth alone explained almost 70
percent of the variation in a district's ability to raise revenue,
while a district's tax rate explained only 13.5 percent.  By 1995,
property wealth explained only about 23 percent of the variation; tax
effort explained almost 51 percent. 

Both Texas and Tennessee reported diminished disparities in per pupil
spending levels across districts, meaning that spending had increased
in the less wealthy districts in each of these states.  For example,
a Tennessee school finance report showed that the disparity in per
pupil expenditures between high- and low-spending districts dropped
from 84 percent before the implementation of the 1992 finance system
to 74 percent 1 year after implementation.\17 In our analysis of
Tennessee school district funding data, we found that, the average
total per pupil funding ($2,476) in the small, rural districts
involved in the Tennessee lawsuit in the fiscal year before the 1992
implementation of Tennessee's new school finance system increased by
31.93 percent to $3,254 by fiscal year 1994-95.  The remaining school
districts experienced a 23.10-percent increase in their average total
funding per pupil in the same period, with the average per pupil
funding increasing from $3,117 to $3,782. 

In Texas and Tennessee, where disparities in educational
opportunities were such an issue that certain districts could not
meet basic education requirements, officials we interviewed reported
improvements in the learning opportunities for pupils in less wealthy
districts.  For example, in Tennessee, a former legislator said that
small, rural districts now have art and music teachers, which they
never had before, and can now offer courses that will better prepare
their students for college.  A 1994-95 Tennessee Department of
Education budget report shows that districts spent the greatest
share, about 80 percent, of the approximately $275 million in new
funds made available to date on classroom-related expenses,
particularly the hiring of new teachers to reduce kindergarten
through eighth grade class sizes. 


--------------------
\15 For this example, a less wealthy district is a district at the
10th percentile of relative wealth.  A wealthy district is a district
just above the 90th percentile. 

\16 Texas Legislative Budget Board, "Fiscal Size-Up 1994-95 Biennium,
Texas State Services."

\17 In this example, the high-spending districts are at the 95th
percentile and the low-spending districts at the 5th percentile. 


   EQUITY SOLUTIONS ARE FRAGILE
   AND PRONE TO CHANGE
------------------------------------------------------------ Letter :7

Although officials we interviewed noted improvements in equity and
other aspects\18 of their state school finance systems, they also
shared concerns about their systems' sustaining these gains. 
Further, because of ongoing pressures from various interest groups,
they observed that their revised systems already have been modified
and are likely to face further alterations.  These officials noted
the following concerns: 

  continued reliance on local property taxes to finance education
     spending may lead to a tax backlash,

  features in the finance formula may not allow districts with high
     numbers of disadvantaged students to keep pace with rising
     educational costs, and

  districts may continue to press for changes in the school finance
     system. 


--------------------
\18 For example, in addition to improvements in equity, Tennessee
officials saw the adoption of a cost-based financing scheme as a
benefit of the new school finance system. 


      ANTITAX SENTIMENT A GROWING
      CONCERN
---------------------------------------------------------- Letter :7.1

Observations made by Tennessee officials were typical of those
regarding antitax sentiment.  In Tennessee, where localities are
required to pay a prorated share toward the cost of their district's
basic education, a state school board official questioned the
willingness of localities to raise their taxes to keep pace with
rising expenses such as teacher salaries.  One Tennessee education
official said that, to avoid raising property taxes to pay for an
increased local contribution, constituents may exert pressure to
change the formula to reduce the local share, which may make it more
difficult for the state to ensure the adequate and equitable
financing of education needs in all districts. 

In Minnesota, state education officials reported that districts are
finding it increasingly difficult to pass optional levies to help pay
for school operations--even since 1991, when the state increased its
equalizing aid to districts that passed the levies.  Minnesota
officials view this development as possibly exacerbating the
disparities among districts' access to revenues. 


      DIFFICULTIES IN MEETING
      INCREASING EDUCATIONAL COSTS
---------------------------------------------------------- Letter :7.2

Officials in all three states expressed concern about the ability of
their state's school finance system to meet growing educational
costs.  For example, Texas education officials that we interviewed
expressed concern about the impact of limiting the tax rate to $1.50
per $100 of property value.  As more districts reach the $1.50
ceiling, their ability to increase spending to meet increased costs
will be severely limited unless the state provides additional funding
or the tax ceiling is raised.  An official with an association that
monitors the equity of Texas' school finance system said that "such a
ceiling may be especially burdensome in less wealthy districts where
the numbers of disadvantaged children with costly educational needs
are growing rapidly." Similarly, an official with a large urban
district in Minnesota said that "the state's cost adjustment factors
are not adequate to fund the educational services needed for its
disadvantaged students." He said that his district, which is
experiencing large increases in the number of disadvantaged children,
"is considering suing the state to obtain increased funding."


      DISTRICTS CONTINUE TO PRESS
      FOR CHANGES
---------------------------------------------------------- Letter :7.3

Districts dissatisfied with the revised school finance systems have
used legal or legislative means to change the systems.  In a 1995
Tennessee Supreme Court case challenging the constitutionality of the
state's new school finance system, the Tennessee Small School Systems
claimed that the new funding scheme was unconstitutional because
equalization would occur over several years and the plan included no
provision to equalize or increase teacher salaries.  In its February
1995 opinion, the state supreme court upheld the plan's
constitutionality, accepting the state's argument that complete
equalization of funding can best be accomplished incrementally, but
found that the plan's failure to provide for the equalization of
teachers' salaries was a significant defect which, if not corrected,
could put the entire plan at risk.  The 1995 Tennessee State
Legislature has since appropriated $7 million of the estimated $12
million needed to equalize increases in teacher salaries. 

In Texas and Minnesota, which both placed limitations on local
contributions to education, officials reported that legislators face
ongoing attempts by wealthy districts to change the school finance
system.  For example, according to officials in Texas, wealthy
districts in Texas, unhappy over the recapture clause in the revised
school finance system, convinced the Texas State Legislature to
somewhat offset the payment they must make.  The 1995 Texas State
Legislature modified the school finance law to allow wealthy
districts paying recaptured funds directly to the state to reduce the
amount owed by the lesser of 4 percent or $80 per credit
purchased.\19 A Texas education advocate said that provisions such as
these subsidize wealthy districts at the expense of less wealthy
districts. 


--------------------
\19 The amount owed is based on the cost to educate additional
children in the wealthy district, which is measured in attendance
credits.  Each credit purchased is added to the district's average
daily attendance until the per pupil property wealth is no more than
$280,000. 


   ISSUES TO BE ADDRESSED BY
   STATES CONSIDERING SCHOOL
   FINANCE REFORM
------------------------------------------------------------ Letter :8

Because many other states face the prospect of reforming their school
finance systems, we asked state officials what advice they had for
other states.  We found three common themes among their
recommendations:  (1) states should first clearly define equity goals
in terms of the funding level needed to ensure adequate learning
resources for all students or the funding needed to ensure a certain
level of student performance, (2) states should link school finance
reform to accountability, and (3) the reform process should be
inclusive and encourage the participation of all groups affected by
such reform. 


      CLEARLY DEFINE GOALS OF
      SCHOOL FINANCE SYSTEM
---------------------------------------------------------- Letter :8.1

Officials in all three states suggested that states clarify the
equity goals of a school finance system by defining such goals in
terms of adequate learning resources or student performance
standards.  The general concern underlying this advice is that states
need to know what they are purchasing with their education dollars. 
Officials suggested, for example, linking the amount of funding to
either the level of resources needed to adequately meet the
educational needs of students or to a certain level of student
performance. 


      LINK FINANCE REFORM TO
      ACCOUNTABILITY
---------------------------------------------------------- Letter :8.2

Officials also urged states to use student performance standards to
provide accountability for increased spending on education. 
Officials said that the accountability was needed to convince parents
and taxpayers that the increased spending would lead to improved
student performance. 


      INCLUDE ALL STAKEHOLDERS IN
      REFORM PROCESS
---------------------------------------------------------- Letter :8.3

In discussing and developing proposals to reform the school finance
system, the officials we talked to suggested including all interested
parties with a stake in education, such as parents, teacher unions,
school officials, and business community representatives.  They also
suggested that it is important for members from the legislative and
executive branches of government and the different political parties
to collaborate in crafting a workable solution.  Officials in all
three states provided examples of how they involved diverse groups in
revising their school finance legislation.  For example, one
Minnesota official said that because the property tax system should
work in conjunction with the education finance system, members of the
primary and secondary education finance committees needed to include
members of the legislature's tax committees in drafting proposals to
change the education finance system. 


   CONCLUSIONS
------------------------------------------------------------ Letter :9

The experience of the three states we studied suggests that reforming
school finance systems to make them more equitable is complex and
difficult.  Legislative solutions have had to be sensitive to
taxpayers' concerns about increased taxes and to concerns of wealthy
districts that want to maintain existing spending levels.  When these
concerns are sufficiently considered to gain passage of finance
reforms, disparities in education funding can be reduced and
educational opportunities in poor school districts improved. 
However, such negotiated solutions are fragile, making efforts to
achieve equity continuous and likely to require periodic adjustments
in school finance systems as student demographics and economic
conditions change. 

Solutions may use several options to increase the education funding
in poor districts, such as generating new revenues or redistributing
existing revenues.  In states that choose to generate new revenues,
it appears to be important to include accountability provisions to
help convince taxpayers that the new investment in education is
worthwhile. 


   AGENCY COMMENTS
----------------------------------------------------------- Letter :10

The Department of Education reviewed a draft of this report and had
no comments.  In addition, we provided state-specific information to
state officials for verification and incorporated their technical
suggestions as appropriate. 


--------------------------------------------------------- Letter :10.1

We are sending copies of this report to appropriate House and Senate
committees and other interested parties.  Please call Eleanor L. 
Johnson on (202) 512-7209 if you or your staff have any questions. 
Major contributors to this report are listed in appendix VI. 

Linda G.  Morra
Director, Education and
 Employment Issues


TECHNICAL APPENDIX
=========================================================== Appendix I

The objectives of this study were to characterize, for each state
reviewed, (1) the reforms to the school finance systems and the
legal, budgetary, and political pressures the state legislatures
faced in making the reforms and (2) the general impact of the
legislative remedies, especially in addressing disparities in
educational funding.  We also determined what advice state officials
could provide for other states similarly reforming their school
finance systems. 

To answer these questions, we conducted case studies of three
states--Tennessee, Texas, and Minnesota.\20 We selected these states
for in-depth review because they had recently reformed their school
finance systems and differed substantially from each other in (1) the
approaches taken to revise their finance systems and (2) such
demographic factors as poverty and student enrollment rates. 

For example, the three selected states collectively illustrate four
different strategies for equalizing education finances--increasing
revenues, redistributing revenues, limiting the contributions of
localities to education, and recapturing funds from wealthy districts
and redistributing them to less wealthy districts.  With regard to
demographic factors, the 1992 poverty rates in the three states
ranged from 12.8 percent in Minnesota to 17.8 percent in Texas, with
the national rate at 14.5 percent.  The percent change projected in
student enrollment from 1990 to 1993 ranged from 1.5 percent in Texas
to 4.2 percent in Minnesota, with an overall projected increase for
the nation at 4.3 percent. 

Analyzing the school finance systems in three states with such broad
variation increases the likelihood that findings common to all three
states would be relevant to other states trying to make their school
finance systems more equitable. 

For each state selected, we reviewed school finance documents and
analyzed data on state budgets, student demographics, and school
district funding levels.  We also interviewed 15 to 19 individuals in
each state who represented a variety of education interests (see app. 
II).  In conducting the case studies, we primarily relied on the
opinions of the officials we interviewed and the supporting
documentation they provided. 


--------------------
\20 For more information on national trends in education finance and
the impact of state education finance reforms on school district
revenues and spending patterns, see the following articles:

Adams, Jacob E., Jr., "Spending School Reform Dollars in Kentucky: 
Familiar Patterns and New Programs, But is This Reform?" Educational
Evaluation and Policy Analysis, Vol.  16 (Winter 1994).

Goertz, Margaret E., "The Equity Impact of the Quality Education Act
in New Jersey," Rutgers University, Consortium for Policy Research in
Education (New Brunswick, N.J.:  1995).

Monk, David H., "Resource Allocation in Schools and School Systems"
In International Encyclopedia of Education, Economics of Education
Section (Oxford, England:  1992).

Odden, Allan R., "Trends and Issues in American School Finance,"
Rutgers University, The Finance Center of the Consortium for Policy
Research in Education (New Brunswick, N.J.:  1994).

Picus, Lawrence O., "Texas School Finance Equity After Edgewood,"
Rutgers University, The Finance Center of The Consortium for Policy
Research in Education (New Brunswick, N.J.:  1995). 


   STATE SELECTION
--------------------------------------------------------- Appendix I:1

To select states to study, we first asked experts in education
finance to identify states that had implemented finance equity
reforms.  Then, for each state identified, we contacted state
education officials or reviewed relevant materials on the state's
school finance system to obtain information on the state's finance
formulas, school finance legislation, revenue-raising strategies, and
limitations, if any, on discretionary spending on local districts. 
We also considered each state's demographic makeup, reviewing such
factors as the concentration of poverty and public school enrollment
and growth rates. 

We asked six national education finance experts\21 to nominate states
that had revised their school finance systems to address inequities
in spending and had begun to implement the revised systems.  The
experts collectively nominated 18 states:  California, Florida,
Indiana, Kansas, Kentucky, Massachusetts, Maryland, Michigan,
Minnesota, Missouri, Nebraska, New Mexico, South Carolina, Tennessee,
Texas, Vermont, Washington, and Wisconsin. 

To further refine the selection of states, we contacted state
education finance officials or reviewed relevant materials on the
state's school finance system to determine the following for each
nominated state:  (1) when the state passed legislation to equalize
education spending, (2) the revenue sources used to finance the
equalization effort, (3) the type of allocation formula used to
distribute funds to the state's public schools, (4) whether the state
operated under a tax or spending limit, and (5) whether any limits
were placed on local contributions to education.  We also used the
most recent U.S.  Department of Education National Center for
Education Statistics data to obtain the 1990 and 1991 state, local,
and federal share of education spending in each state. 

Using this additional information, we first reduced the 18 states to
8 using the following criteria: 

  To ensure that state officials would be able to recollect the
     circumstances surrounding the passage of the school finance
     reform legislation, we eliminated eight states that either had
     not passed such laws or had passed them before 1990: 
     California, Florida, Maryland, New Mexico, South Carolina,
     Vermont, Washington, and Wisconsin. 

  To ensure that school finance reforms had been in place long enough
     to allow us to study their effects, we eliminated one state
     (Michigan) where voters had only recently (March 1994) approved
     an increase in the general sales tax to fund a new school
     finance system passed by the legislature in December 1993. 

  To ensure that we would study states that were not already the
     subject of many studies\22 and on the advice of one of the six
     experts, we eliminated one state (Kentucky). 

Of the remaining eight states, we then judgmentally selected three
that differed in their approaches to equalizing their school finance
systems and differed substantially among certain demographic factors. 
We used the most recent Bureau of the Census data to obtain
demographic information such as the 1992 poverty rate, recent shifts
in kindergarten through 12th grade enrollment, and ethnicity. 


--------------------
\21 Kathy Christie, Education Commission of States; Mary Fulton,
Education Commission of States; Margaret Goertz, Consortium for
Policy Research in Education, Rutgers University; Allan Odden,
Consortium for Policy Research in Education, University of
Wisconsin-Madison; Lawrence Picus, Center for Research in Education
Finance, University of Southern California; Terry Whitney, National
Conference of State Legislatures. 

\22 See for example, J.  Augenblick, An Evaluation of the Impact of
Changes in Kentucky's School Finance Program, The SEEK Program:  It's
Structure and Effects, prepared for the Kentucky Department of
Education by Augenblick, Van de Water, and Associates, 1991. 


   DATA ANALYSIS
--------------------------------------------------------- Appendix I:2

For each state selected, we reviewed school finance documents and
analyzed data on state budgets, student demographics, and school
district funding levels.  We analyzed (1) the state's school finance
system, laws, formulas, and spending patterns; (2) equity lawsuits
dealing with state school finances; (3) state budget data for state
spending and for education to determine the budget pressures
operating when the state was considering school finance reform
legislation; (4) student demographic data to identify any relevant
trends in target populations, such as special education students,
whose educational costs may be generally higher than average; and (5)
school district spending data to verify where possible the impact new
reforms have had on reducing funding disparities.  We did not attempt
to determine what impact the school finance reform had on improving
student performance. 


   INTERVIEWS
--------------------------------------------------------- Appendix I:3

We interviewed 15 to 19 individuals in each state who represented a
broad array of interests in elementary and secondary education. 
Specifically, to obtain information and opinions on the state's
effort to equalize education funding, we interviewed legislators;
officials in the state education agency and the state board of
education; state attorneys; state budget officials; and
representatives of statewide education associations, such as teacher
unions; associations for school administrators; and parent-teacher
associations.  We also interviewed individuals knowledgeable of both
the plaintiffs' and the states' interests in the school finance
equity lawsuits.  See appendix II for a list showing the affiliation
and position of the individuals we interviewed in each state. 

The interviews were open ended.  Major questions covered, but were
not restricted to, the following subjects:  (1) the problems placing
the biggest demands on the state budget and their impact on funding
for kindergarten through 12th grade education in general and,
specifically, on the school funding scheme; (2) within the
kindergarten to 12th grade education budget, what programs have been
placing the biggest demand on the state's education budget, and what
has been these programs' impact on public schools funding; (3) their
satisfaction that the current education finance system provides an
adequate education for all students; (4) their satisfaction that the
current finance system provides for a more equitable distribution of
state education funds; (5) the legal, political, and economic
constraints that challenged state policymakers in developing the
funding and allocation system and the way policymakers dealt with
those constraints in developing the system; (6) the intended
financial outcomes of the new school finance system and the extent to
which the state has succeeded in achieving these outcomes; (7) the
trade-offs that resulted or are anticipated from implementing the new
finance system; and (8) advice for states that are trying to revise
their school finance system. 


OFFICIALS INTERVIEWED FOR CASE
STUDIES
========================================================== Appendix II

To conduct our case study, we interviewed the listed officials
associated with the following state agencies and offices and
education associations: 


      MINNESOTA
------------------------------------------------------ Appendix II:0.1

Minnesota House of Representatives

  Member of the Education Committee and K-12 Finance Division of the
     Committee

  Former Chair of the K-12 Education Finance Division of the
     Education Committee and member of the Ways and Means Committee
     (currently director of the St.  Paul Children's Initiative)

  Ways and Means Fiscal Analyst/Education Finance

  Research Staff K-12 Education

Minnesota State Senate

  Vice Chair, Education Committee, and Vice Chair, Education Funding
     Division

Minnesota Department of Education

  Director of Finance

  Assistant Commissioner

Minnesota Department of Finance

  Team leader for Human Development Programs

  Executive Budget Officer

Minnesota Office of the Attorney General

  Assistant Attorney General

University of Minnesota, College of Education

  Professor, Department of Educational Policy and Administration

Minneapolis Public Schools

  Executive Director for Policy and Strategic Services

Minnesota Parent Teachers Association

  President-Elect

Coalition for Education Reform and Accountability

  Executive Director

  Former Director of the Minnesota Business Partnership

Schools for Equity in Education (formerly the Association of Stable
and Growing School Districts)

  Executive Director

  Legislative Analyst

Association of Stable and Growing School Districts

  Plaintiffs' Attorney

White Bear Lake School District

  Superintendent of Schools


      TENNESSEE
------------------------------------------------------ Appendix II:0.2

Tennessee House of Representatives

  Chairman of the House Education Committee

Tennessee Senate

  Current Chairman of the Senate Education Committee

  Former Chair of the Senate Education Committee and current lobbyist
     for the Tennessee School Systems for Equity

Tennessee Advisory Commission on Intergovernmental Relations

  Executive Director

Tennessee Department of Education

  Commissioner

  Assistant Commissioner

Tennessee State Board of Education

  Executive Director

  Executive Assistant

Tennessee Department of Finance and Administration

  Budget Coordinator

  Administrative Budget Analyst

Tennessee Office of the Attorney General and Reporter

  Solicitor General

  Associate Solicitor General

Tennessee Organization of School Superintendents

  Executive Director

Tennessee School Board Association

  Deputy Executive Director

Tennessee Education Association

  President

  Executive Director

  Research Manager

Superintendent of Crockett County Schools and former head of
Tennessee Small School Systems, the group representing the plaintiff
districts in the 1988 lawsuit


      TEXAS
------------------------------------------------------ Appendix II:0.3

Texas House of Representatives

  Former legislator who chaired the House Public Education Committee

Texas State Senate

  Former senator who chaired the Senate Education Committee

Texas State Legislature, Legislative Budget Board

  Manager, Public Education

Texas Education Agency

  Associate Commissioner, Chief of Operations

  Chief Legal Counsel

  Coordinator, School Finance and Fiscal Analysis

Texas Attorney General Office

  Chief, General Litigation Division

Texas Association of School Boards

  Associate Executive Director for Research and Development

Texas Center for Educational Research

  Director

Texas State Teachers Association

  Director

Texas Association of School Administrators

  Executive Director

  Assistant Director

The Equity Center

  Executive Director

  Director of Member Services

Moak Consulting

  Principal of Moak Consulting


TEXAS CASE STUDY
========================================================= Appendix III

The Texas Supreme court held in 1989 that the state school financing
system, which relied heavily on local property taxes, was
unconstitutional.  Since 1989, school finance issues in Texas have
been dominated by legislative attempts to provide districts greater
equity in their ability to raise revenue.  The courts rejected two
approaches passed by the Texas State Legislature before accepting a
third, which has been in place since 1993. 

Key characteristics of the new approach are (1) a mechanism for
equalizing property wealth among districts and (2) revenue limits for
all districts through a cap on property tax rates.\23 Included in the
approach is transferring part of wealthy districts' property tax
revenue to less wealthy districts.  Districts were given a choice of
five options for disposing of excess wealth.  Most chose to simply
write a check to the state.  Caps were also placed on property tax
rates.  Finally, the level of state support to districts was linked
to a formula that accounted for the districts' revenue-raising
ability and tax effort. 

Texas officials interviewed, who included former legislators, state
officials, educators, and others involved in the years of legal and
political controversy and the results that followed, believed that
the new system has achieved greater equity.  However, they also cite
several concerns that could undermine the state's efforts to achieve
equity, such as taxpayer resistance to the higher property taxes that
have resulted. 


--------------------
\23 A cap on property tax rates that existed before the finance
reform was modified by the legislature in 1993 and 1995, according to
officials. 


   BACKGROUND
------------------------------------------------------- Appendix III:1

Funding for the 3.6 million students in Texas's 1,046 school
districts totaled $19.5 billion in school year 1993-94.  Of this,
$17.3 billion was budgeted by local school districts.  The largest
share of the district-budgeted revenue, 50.4 percent, came from
localities.  The remainder came from the state (41.6 percent) and the
federal government (8 percent).  Part of the remaining $2.2 billion
was used for items not budgeted by local districts such as textbook
purchases and state matching contributions to the teacher retirement
fund; the remainder was due to district underbudgeting of the revenue
they actually received.  Between 1985 and 1995, local funding
increased by 117 percent, while state funding increased by 60
percent. 

At the state level, elementary and secondary education is the largest
item in the state budget (about 26 percent in fiscal year 1994).  The
primary source of state revenue for education is the sales tax; taxes
on oil and gas production, corporation franchises, and tobacco and
alcohol; lottery proceeds, interest and dividends, funds from the
Available School Fund,\24 and other state fees and taxes provide the
rest of the education revenue.  At the local level, virtually all of
the revenue is raised through property taxes. 

Between 1990 and 1994, total expenditures for elementary and
secondary education increased more than 34 percent.  Much of this
increase has been used to offset the rapid growth in the school-age
population and increases in the number of special needs students. 
The cost of educating special needs students is generally higher than
the cost of educating children without special needs.\25 Texas has
one of the largest and fastest growing school-age populations in the
nation.  Between 1990 and 1994, the total number of students
increased from 3.3 million to 3.6 million (8.6 percent).  During that
period, the number of special needs students increased at an even
faster pace:  students participating in special education increased
almost 33 percent; students in bilingual programs increased almost 36
percent; and economically disadvantaged students increased more than
22 percent. 


--------------------
\24 The primary revenue sources of this fund are one-fourth of the
state motor fuels tax and investment earnings from the Permanent
School Fund, which is an endowment fund consisting of state lands,
the sale of lands, and royalty earnings. 

\25 See School Finance:  Trends in U.  S.  Education Spending
(GAO/HEHS-95-235, Sept.  15, 1995) and School Age Children:  Poverty
and Diversity Challenge Schools Nationwide (GAO/HEHS-94-132, Apr. 
29, 1994). 


   DISPARITIES IN PROPERTY WEALTH
   AND ACCESS TO REVENUE PROMPTED
   LAWSUIT
------------------------------------------------------- Appendix III:2

In 1984, a group of less wealthy school districts filed a suit
(Edgewood v.  Kirby) charging that the state's heavy reliance on
property taxes to fund education resulted in expenditure differences
that violated the Texas Constitution.  The districts argued that the
disparity in districts' property wealth limited the ability of less
wealthy districts to raise adequate funds. 

After a trial in 1987 and appeals through the state court system, the
Texas Supreme Court in 1989 ruled that the finance system violated
the constitutional provision for an "efficient" system.  The court
noted that glaring disparities existed in the abilities of less
wealthy school districts to raise revenues from property taxes
because taxable property wealth varied greatly by district.  The
wealthiest district had over $14 million of property wealth per pupil
while the poorest had about $20,000.  Many less wealthy districts
were taxing themselves at a much higher rate than wealthy districts
but producing far less revenue.  As a result, less wealthy districts
struggled to raise the revenue needed to fund programs that met the
state's basic education requirements, while wealthy districts were
able to pay for a wide array of enrichment programs. 

The court said, "a direct and close correlation between a district's
tax effort and the educational resources available to it" must exist. 
The court noted that although districts did not have to spend equal
amounts per student, they must have substantially equal access to
similar revenues. 


   COURT REJECTS TWO LEGISLATIVE
   SOLUTIONS
------------------------------------------------------- Appendix III:3

In response to the Texas Supreme Court decision, in June 1990, the
legislature passed Senate Bill (SB) 1, a reform measure that provided
more money for equalization but left intact the school finance
system.  Less wealthy districts appealed, and, in January 1991, the
supreme court struck down SB 1, holding that the public school
finance system still violated the "efficiency" provision of the Texas
Constitution.  The court said that, while SB 1 improved the school
finance system, it still did not restructure the system to ensure
that less wealthy districts had substantially equal access to revenue
for similar tax effort.  The court suggested the solution of either
consolidating school districts or district tax bases. 

Everyone we interviewed said that consolidating school districts was
not a workable option because of negative public reaction.  An
official who was involved with writing the school funding legislation
said, "many citizens see consolidation as a threat to local control
and to the identity and economic viability of their community."

Rejecting the idea of consolidating school districts, the legislature
created a system that would partially consolidate only the tax bases. 
This measure, SB 351, was signed into law in April 1991.  It created
188 County Education Districts, which were countywide taxing entities
encompassing several school districts with a cumulative property
wealth no greater than $280,000 per pupil.  These districts were to
levy state-mandated property taxes and redistribute the revenues to
their member districts on an equalized basis.  This time the wealthy
districts appealed, and, in January 1992, the Texas Supreme Court
ruled that SB 351 was unconstitutional because it (1) violated the
state constitution provision that prohibits a state property tax and
(2) levied a school property tax without local voter approval.  The
supreme court gave the legislature until June 1993 to create a new
school finance system. 

When the legislature met in regular session in 1993, it submitted for
voter approval a constitutional amendment legalizing the major SB 351
provisions.  In May 1993, Texas voters defeated the measure by a wide
margin.  Then, with time running out and still trying to design a
system that would not force district consolidation, the legislature
passed a new measure, SB 7, in May 1993.  In January 1995, the Texas
Supreme Court upheld SB 7's constitutionality. 


   CURRENT APPROACH RAISES LESS
   WEALTHY DISTRICTS' ACCESS TO
   FUNDS, LIMITS WEALTHY
   DISTRICTS' SPENDING
------------------------------------------------------- Appendix III:4

In developing a system that would meet the test of the state supreme
court, the legislature chose not to develop a solution that required
a further increase in state taxes, according to state officials and
education advocates.  The legislature had been putting more money
into the system to address equity issues since the early 1980s and
determined that to address the court's concerns, it would have to
develop a solution that concentrated on redistributing local funding. 
Complicating the ability to find additional state dollars were rapid
increases in expenditures for Medicaid and criminal justice programs. 
Between 1991 and 1995, state spending for Medicaid and criminal
justice programs increased 117 and 135 percent, respectively. 

The measure passed by the legislature and approved by the supreme
court has several key features.  It (1) creates greater equality in
property wealth among districts, (2) sets limits on local property
tax rates, and (3) provides supplemental state funding for less
wealthy districts to equalize the revenue received on their local
taxes. 


      PART OF WEALTHY DISTRICTS'
      PROPERTY WEALTH TRANSFERRED
      TO LESS WEALTHY DISTRICTS
----------------------------------------------------- Appendix III:4.1

The new mechanism in SB 7 that sets it apart from the other funding
systems rejected by the court is a recapture provision that creates
greater equality in property wealth among districts.  This provision
was enacted because other options for closing the gap in spending
between the wealthy and less wealthy districts were limited,
according to several people we interviewed.  Politically, they said,
the state could not pursue consolidation, and, financially, it could
not raise the level of poor districts' spending to that of wealthy
districts.  Because of the vast disparities in property wealth, the
estimated cost of the latter option was four times the amount of the
entire state budget. 

The new provision, which took effect in 1993, required districts with
property wealth exceeding $280,000 per pupil to reduce their taxable
wealth to no more than that amount.  Districts had five options for
doing so:  (1) consolidating with another district or districts, (2)
transferring property to a poor district for taxation purposes, (3)
purchasing attendance credits from the state (in effect, writing a
check to the state), (4) contracting with another district to educate
some of their students (in effect, writing a check to the district),
or (5) creating a taxing district by consolidating the tax base with
one or more other districts. 

This provision affected 90 of the state's 1,046 school districts in
school year 1993-94.  Collectively, these districts had to reduce
their property wealth, using one or more of the options, resulting in
the recapture of more than $430 million in local property tax.  Of
these 90 districts, none used options 1, 2, or 5; 61 used option 3,
22 used option 4, and 7 used a combination of options 3 and 4. 

SB 7 included a provision that allowed some of these districts to
retain a greater amount of taxable wealth for the next several years. 
The provision, which expires in 1996,\26 permits wealthy districts to
maintain their spending at 1992-93 levels and to retain enough
property wealth to do so, subject to certain limitations.\27 This
provision was included out of concern that rapid reductions could
harm student programs, according to a state official. 


--------------------
\26 This provision was modified in the 1995 legislative session.  The
hold-harmless provision was extended until 1998 for districts that
select either option 2 or 3; for districts that select options 1, 4,
or 5, the provision expires in 1996. 

\27 Districts were allowed to retain the property wealth needed to
produce 1992-93 spending at a tax rate of $1.375 per $100 of property
value in 1993-94 and $1.50 through 1995-96. 


      CAPS PLACED ON PROPERTY TAX
      RATES
----------------------------------------------------- Appendix III:4.2

To further limit spending of the wealthy districts, SB 7 capped
school property tax rates at $1.50 per $100 of property value for all
districts.  Districts may call elections to increase the $1.50 limit
by local voter authorization to no more than $2.00 for bonds and debt
service.\28


--------------------
\28 The 1995 Texas State Legislature modified this limitation so that
the $1.50/$100 property value tax limit is for maintenance and
operations with the additional $.50 for servicing debt on bonds with
the approval of the voters.  The prior law limited both maintenance
and operations and debt service to $1.50. 


      LEVEL OF STATE SUPPORT
      LINKED TO REVENUE-RAISING
      ABILITY AND TAX EFFORT
----------------------------------------------------- Appendix III:4.3

Texas distributes state funds for public education through a
two-tiered system of formulas known as the Foundation School Program. 
Tier I, a foundation formula, provides funds for meeting the state's
basic education requirement.  All districts are eligible to
participate if they levy a property tax of at least $.86 per $100 of
property value.\29 Tier II funding is designed to provide additional
funds to enrich the basic foundation program and to offset the wealth
of wealthy districts.  Under the provisions of SB 7, participation in
tier II funding is limited to districts with per pupil property
wealth below $210,000.\30 These districts can receive tier II funding
if they set their property tax rates above the level required for
tier I funding--
between $.86 cents and the maximum of $1.50 per $100 of property
value. 

Under this arrangement, less wealthy districts willing to tax
themselves at higher rates will receive more state aid.  Districts
with per pupil wealth above $210,000, which can raise more revenue
with equal tax effort than their counterpart districts below this
level of per pupil wealth are not eligible to receive tier II aid. 
Districts with per pupil wealth below $210,000 receive tier II aid in
direct proportion to the degree to which they are willing to raise
their own tax rates. 


--------------------
\29 The tier I formula also includes weights for factors beyond the
control of the districts such as special needs students and special
adjustments that address the differences in the cost of education for
rural and urban districts. 

\30 In 1995, the state legislature increased the per pupil property
wealth ceiling for tier II participation from $205,500 to $210,000. 


   MORE EQUITABLE FUNDING AND
   GREATER TAXPAYER EQUITY CITED
   AS SUCCESSFUL OUTCOMES
------------------------------------------------------- Appendix III:5

State officials, former legislators, education advocates, and others
we interviewed were unanimous in saying that the new system had
greatly improved equity.  They noted that compromises had to be made
to increase the level of funding available to poor districts while
not forcing school district consolidation across the state, but they
said that the amount of progress towards greater equity had been
substantial.  For example, when the new system is fully implemented
in 1999, the portion of unequalized revenue in the system will have
decreased from nearly 21 percent of all state and local revenues in
1989 to less than 2 percent.\31

Our interviewees regarded greater taxpayer equity as a significant
outcome of the new system.  Under the system in place in 1989,
wealthy districts were able to raise large amounts of money at a low
tax rate while less wealthy districts--even if they were taxing
themselves at a much higher rate--could not raise the funds needed to
provide an education program that met basic requirements.  They
pointed to evidence that the new system's limitations on revenue
raised through the property tax in wealthy districts and rewards to
less wealthy districts for revenue raised through tax effort were
affecting that disparity.  For example, in 1989, more than 69 percent
of the disparity among districts in per pupil revenue was due to
differences in property values; by 1999, when the system has been
fully implemented, almost 77 percent of the disparity will be due to
differences in tax effort, according to estimates. 


--------------------
\31 It has also been reported that Texas had made considerable
progress in reducing the variation in per pupil spending among school
districts before enactment of the school finance system embodied in
SB 7, particularly in the years 1988-89 to 1992-93.  See Lawrence O. 
Picus, "Texas School Finance Equity After Edgewood," The Finance
Center of the Consortium for Policy Research in Education, August
1995. 


   OFFICIALS EXPRESS CONCERNS THAT
   INEQUITIES IN STATE SCHOOL
   FINANCE SYSTEM COULD REEMERGE
------------------------------------------------------- Appendix III:6

While our interviewees cited accomplishments under the new system,
they also collectively identified four concerns about inequities in
the school finance system reemerging:  (1) the continued heavy
reliance on local property taxes, (2) wealthy districts' concerns
about sharing their wealth, (3) less wealthy districts' concerns
about continued differences in per pupil spending, and (4) districts'
inability to meet rising costs. 


      CONTINUED RELIANCE ON
      PROPERTY TAXES
----------------------------------------------------- Appendix III:6.1

The Texas school finance system continues to rely on the local
property tax for more than half of its total revenue--and under SB 7,
local property taxes have increased.  Wealthy districts have had to
increase their property tax rates to offset the loss of state aid and
maintain spending levels.  In addition, many less wealthy districts
have also increased their taxes because, under the tier II formula,
the state rewards less wealthy districts that raise property taxes by
increasing their state aid.  Between 1990 and 1994, the effective
property tax rate statewide has increased more than 43 percent, from
$.96 per $100 of property wealth to $1.38.  In 1994, 94 percent of
the districts had a total effective tax rate that exceeded $1.00 per
$100 of property wealth. 

Almost all of those interviewed said that the new system had been
designed to rely on the local property tax for most of its revenue to
limit state government's costs.  However, most officials expressed
concerns about the state's reliance on the local property tax for
such a large part of public education and said that they were
concerned about a public effort to roll back tax rates in the future. 
In addition, in the fast-growing districts, funds needed to build
schools are competing with funds needed to improve education
programs, which decreases educational opportunity, according to an
education advocate. 


      WEALTHY DISTRICTS' CONCERNS
      ABOUT SHARING TAXABLE WEALTH
----------------------------------------------------- Appendix III:6.2

Wealthy districts are dissatisfied with this new system and have
pressured the legislature to make changes, according to state
officials and education advocates.  For example, in 1995, the
legislature changed the provision that requires wealthy districts to
reduce their taxable wealth.  Under this change, those districts that
write a check to the state (option 3) may reduce their costs through
a discount and extend the hold-harmless provision for an additional 2
years.\32 In addition, the state is permitting wealthy districts to
retain the money paid for appraising their district's property when
such an appraisal is required to meet the recapture clause
provisions.  Continued pressure on the legislature to make changes
that benefit the wealthy districts contradicts state efforts to
improve equity between the wealthy and less wealthy districts. 


--------------------
\32 The reason for this change is that if the state collects the
funds from the wealthy districts, rather than gives the funds
directly to less wealthy districts through another option, it
provides an estimated additional $35 million to allocate to districts
throughout the state, according to a state official. 


      LESS WEALTHY DISTRICTS'
      CONCERNS ABOUT CONTINUED
      DIFFERENCES IN PER PUPIL
      SPENDING
----------------------------------------------------- Appendix III:6.3

Officials also noted that the new system did not bring something that
poor districts had wanted--equality in per pupil spending with
wealthy districts.  Once the system is fully implemented, in 1999, it
will permit wealthy districts to spend about $600 more per weighted
pupil than less wealthy districts.  The state supreme court indicated
in its first ruling that although substantially equal yield for
similar tax effort was required to meet the test of efficiency, a per
capita distribution or equal spending per pupil was not.  Despite the
court ruling, however, the expected disparity in spending may be too
much, according to some education advocates, given that $600 per
pupil is a significant difference (for example, it equals $15,000 per
25-student classroom) that could give students in wealthy districts
an advantage in financing educational opportunities. 


      LESS WEALTHY DISTRICTS'
      INABILITY TO MEET RISING
      COSTS
----------------------------------------------------- Appendix III:6.4

The effect of Texas' school finance system has been to provide more
revenue for less wealthy districts while limiting the amount of
revenue available to wealthy districts.  Most officials said that
they thought that the new system is achieving its goal--greater
equity and more revenue for less wealthy districts.  However, they
also said that they have concerns about the system because of the
statutory tax rate ceiling.  As more school districts reach the $1.50
ceiling, their ability to increase spending to meet increased costs
will be severely limited unless the state provides additional funding
or the tax ceiling is raised.\33 This current tax rate could be
particularly burdensome for fast-growing districts with large numbers
of minority and economically disadvantaged students.  At issue is
whether these districts will be able to fund the costly services
needed to meet students' needs.  For example, in 1994, of the more
than 445,000 students in the 123 districts with the lowest per pupil
property wealth, 80 percent were minority students, 24 percent
participated in bilingual programs, and almost 70 percent were
economically disadvantaged. 


--------------------
\33 The 1995 legislature changed the system to (1) increase the per
pupil basic allotment from $2,300 to $2,387, (2) increase the
property wealth for tier II participation from $205,500 to $210,000,
and (3) modify the $1.50/$100 property wealth tax ceiling so that in
effect the ceiling is increased, according to a state official. 


TENNESSEE CASE STUDY
========================================================== Appendix IV

In response to a suit filed by small, rural districts, a state court
ruled in 1991 that Tennessee's school finance system was
unconstitutional, leaving it to the legislature to devise a remedy. 
This ruling came when efforts were already under way in the state to
not only revamp the state's school finance system, but also to reform
the management and academic curriculum of the state's public
elementary and secondary schools as well.  In a budgetary environment
in which health and correction costs were increasing and facing
political pressures to incorporate accountability and maintain local
control, the Tennessee legislature passed legislation in 1992 to
reform the school finance system. 

Motivated by a potential court-imposed solution, the legislature
increased the amount of state funds for education, funded it with a
new half-cent sales tax, imposed accountability provisions, and
crafted what has been described as a win-win solution that benefited
all districts. 

Legislators, state education officials, school district
administrators, and others we interviewed said that the state has
improved the educational opportunities of students in poor districts
since 1992.  Indicators of success included reduced spending
disparities among districts, a large share of the funds going to
classroom expenditures, and more educational opportunities (richer
curriculum).  Officials also praised other aspects of the revised
school finance system, such as the cost-based approach to funding
education and the flexibility districts have to spend their funds. 
However, officials we interviewed also identified several concerns
dealing with a growing antitax sentiment, teacher salary increases,
limits on local spending, the educational needs of the urban poor,
and accountability.  As a result of a 1995 supreme court decision,
the state has taken action to finance teacher salary increases. 
Depending on how some of the other concerns are handled, officials
suggested that inequities in the state's school finance system may
recur. 


   BACKGROUND
-------------------------------------------------------- Appendix IV:1

Spending for public elementary and secondary education in Tennessee
totaled $3.4 billion in fiscal year 1994.  State contributions, the
largest share, amounted to 49.5 percent of the total, while local
governments contributed 40.6 percent, and the federal government
contributed 9.9 percent. 

Most of the state funding for education, including higher education,
is earmarked and primarily comes from Tennessee's 6-percent sales
tax, the state's single largest tax revenue.  The state does not levy
property tax and collects an income tax only on unearned income such
as on stock dividends.\34 In fiscal year 1994, the sales tax amounted
to about 65 percent of education funding.  Additional sources of
state revenue for education include other earmarked revenues, such as
taxes on tobacco and mixed drinks, and general fund revenues from a
broad range of licenses, fees, and other sources. 

Property taxes and local sales taxes are the two major sources of
local district tax revenues for elementary and secondary education. 
In school year 1993-94, property taxes accounted for 36.5 percent of
local revenues in support of public schools, and local-option sales
taxes accounted for 28 percent.  The local-option sales tax allows
localities to raise the 6-percent sales tax rate by as much as 2.75
percentage points.  The state requires at least one-half of the
local-option sales tax revenue to go to education. 


--------------------
\34 The income tax generated only 1.7 percent of the total state
revenue available in fiscal year 1993-94. 


   SMALL, RURAL DISTRICTS SUED
   STATE OVER FUNDING DISPARITIES
-------------------------------------------------------- Appendix IV:2

In 1988, the Tennessee Small School Systems, representing 77 of the
139 districts\35 in Tennessee, filed suit in chancery court against
the state, claiming that, because of disparities in funding, the
state school finance system violated the education clause and the
equal protection requirements of the state constitution. 
Frustrations arising from the state's slow pace in enacting school
finance reforms prompted the lawsuit.  Our analysis of school year
1989-90 student data showed that districts involved in the lawsuit
tended to be poorer than those who were not involved because the
percentage of students eligible to participate in the free or
reduced-price lunch program in a plaintiff district averaged about 37
percent compared with about 30 percent in a nonlawsuit district. 
However, almost 50 percent of Tennessee's students eligible to
participate in the lunch program were in the nine large urban and
suburban districts that intervened on the state's behalf out of
concern for losing funding to rural districts. 

The plaintiff districts asked the court to declare the state's school
finance system unconstitutional, to enjoin the state from acting
under the statutory school finance system, and to require the
legislature to enact a constitutional school finance system.  In
September 1991, the chancery court ruled in favor of the small
districts, finding that the school finance system violated the equal
protection provisions of Tennessee's constitution but delaying the
effective date of its order until June 30, 1992, giving the
legislature an opportunity to correct constitutional deficiencies. 


--------------------
\35 Tennessee systems are the local education agencies that operate
elementary and secondary schools.  For consistency in reporting, we
refer to systems as districts. 


   STATE SUPREME COURT RULED
   EXISTING SYSTEM
   UNCONSTITUTIONAL
-------------------------------------------------------- Appendix IV:3

The state and a group of urban and suburban district intervenors
appealed the 1991 chancery court ruling to the court of appeals,
which reversed the lower court order; the case was then appealed to
the state supreme court by the Tennessee Small School Systems.  In
1993, the state supreme court ruled that Tennessee's school finance
system was unconstitutional.  The court found that the state failed
to show a legitimate state interest justifying granting to some
citizens educational opportunities that are denied to others and,
thus, held that the school finance system violated the constitutional
guarantee of equal protection. 

The court found that the state equalized (that is, distributed funds
on the basis of educational costs and ability to pay) less than $60
million of its $2.5 billion education expenditures and that none of
the funds raised by the local-option sales tax were equalized.  As a
result, substantial disparity existed in the revenues available to
the different school districts.  In 1987, the disparity in total
current funds available per pupil showed that some districts had more
than twice as much as others--$1,823 per pupil compared with $3,669. 
The court found that the disparity was due to the state's reliance on
local governments to fund education and local governments' varying
ability to raise sufficient revenues and not necessarily due to an
inadequate effort by localities to tax themselves.  School districts
with more retail activity and higher property values and commercial
development had more funds to educate their children than districts
with less retail activity and lower property values.  As one official
put it, "Not every county has a Wal-Mart."

The disparity in funding, the court concluded, led to students in the
plaintiff schools not having equal access to adequate educational
opportunities, such as laboratory facilities; computers; current
textbooks; buildings; and music, art, and foreign language courses,
some of which were required by the state.  Further, plaintiff schools
had difficulty retaining teachers, funding needed administrators, and
providing sufficient physical education and other programs. 

The court linked inadequate funding of the plaintiff schools to their
educational outcomes.  The court noted that, in the 10 wealthiest
districts for the 1988-89 school year, 66 percent of the elementary
schools and 77 percent of the secondary schools were accredited by
the Southern Association of Colleges and Schools compared with 7
percent and 40 percent, respectively, in the 10 poorest districts. 
The court observed that graduates from accredited high schools have
better success in college acceptances.  Students in the plaintiff
schools, however, had poor standardized test results and more need
for remedial courses in college. 


   PROPOSED LEGISLATIVE REMEDY
   CALLED FOR INCREASED SPENDING
   DESPITE GROWING BUDGET
   PRESSURES
-------------------------------------------------------- Appendix IV:4

While the case was pending in chancery court and well before the 1993
supreme court decision, legislative leaders began to develop a
remedy, building on the work of an ad hoc committee of statewide
education officials formed by the Tennessee State Board of Education
and making refinements as developed by officials in the Governor's
administration.  The committee had been analyzing Tennessee's school
finance system since 1986, reported a State Board of Education
official, and, by 1991, had developed and refined recommendations for
a system.  This system, termed the Basic Education Program, funded
local school districts on the basis of the cost of providing a basic
education\36 and determined the local share of this cost on the basis
of a locality's fiscal capacity.\37 Assuming the state was
responsible for funding about two-thirds of the total cost of the
program, the governor's administration estimated, according to an
Assistant Commissioner for Tennessee's Department of Education, that
the additional state funds required would be $665 million, to be
phased in over 6 years. 

According to a budget coordinator in the state's Department of
Finance and Administration, the call for increased spending on
education came when the state was facing budget pressures from
Medicaid and corrections.  Enrollment growth was increasing Medicaid
expenditures, and a prison construction program was fueling
corrections expenditures, reported the budget coordinator.  In our
analysis of state budget data, we found that Medicaid expenditures
increased by 103.6 percent from fiscal year 1988-89 to fiscal year
1991-92, while corrections expenditures increased by 19.8 percent
during this period.  Further, the budget coordinator said that
demands to equalize the state's school finance system posed the
biggest education-related pressure on the budget for this period. 
However, he also said that costs associated with serving special
education students--who were increasing at a faster rate than the
general student population--also placed some pressure on the budget. 
In support of his opinion, we found that while Tennessee's net
enrollment increased by 3.9 percent from 860,101 in school year
1987-88 to 893,272 in school year 1991-92, the number of special
education students increased by 18.4 percent--from 129,725 to 153,634
over this same period. 


--------------------
\36 Relying in part on guidance from the Southern Association of
Colleges and Schools, the committee found that the essential
components needed for a basic education included teachers for regular
education, special education, and vocational programs; support staff
such as principals, librarians, counselors, and social workers;
classroom items such as textbooks, instructional materials, and
technologies; and nonclassroom support associated with central office
functions, pupil transportation, plant operation and maintenance, and
capital outlay. 

\37 Tennessee uses a regression model to estimate counties' fiscal
capacity.  Factors in the model that determine local fiscal capacity
include tax base, ability to pay, resident tax burden, and student
population.  A proportionate share of the costs of the Basic
Education Program is assigned to each school district on the basis of
its county's relative capacity. 


   REFORMS WERE ENACTED AMID LEGAL
   AND POLITICAL PRESSURES
-------------------------------------------------------- Appendix IV:5

In developing the specific legislation for the Basic Education
Program, legislators faced at least two major challenges:  first, how
to raise the estimated $665 million needed in additional revenue to
fully fund the program (level up the financing) and, second, how to
equitably distribute funds among districts.  In accomplishing these
tasks, the legislature faced legal and political pressures. 


      POTENTIAL COURT-IMPOSED
      SOLUTION SPURRED LEGISLATIVE
      ACTION
------------------------------------------------------ Appendix IV:5.1

The chancery court ruling and possible further court action motivated
the Tennessee State Legislature to pass the Education Improvement
Act, which established the Basic Education Program and funded it
using the formula developed by the State Board of Education.  The act
also restructured the management of schools, set new academic
standards, and mandated a new accountability system.  The legislature
then passed a half-cent sales tax increase to finance the act. 


      ACCOUNTABILITY PROVISIONS
      COUNTERED RESISTANCE
------------------------------------------------------ Appendix IV:5.2

Regarding increased revenues, officials we interviewed, including key
legislators at the time the new laws were passed, talked about the
difficulty in convincing other legislators and members of the public
that an increase in education spending was needed.  Among the
opposition were certain private education groups that believed any
increase in funding for public education was a waste\38 and members
of the business community who opposed a sales tax increase with no
guarantee that the funds would improve education.  Using an income
tax to finance the plan proved not to be a viable option because the
Tennessee governor tried and failed, in a special session, to pass
what would have been the state's first broadly based income tax. 

Legislators and state education and other officials involved in
crafting the legislation said that the inclusion of accountability
provisions and the half-cent sales tax law were essential to passing
the Basic Education Program.  They cited key financial accountability
provisions such as earmarking the revenue raised by the half-cent
sales tax for education and specifying that revenues could not be
spent on increases in teacher salaries--an expenditure many
legislators believed was not linked to improvements in learning. 
They said that despite some opposition from teachers, school
administrators, and some legislators, it was also important to
include programmatic accountability provisions which, among other
things, made local school officials accountable to the state for
school district performance.  For example, the law gave the
Commissioner of Education power to remove from office local school
board members or superintendents of districts that failed by school
year 1994-95 to meet performance goals in such areas as student
attendance rates and test scores.  To facilitate this accountability,
the law also required all districts to elect local school board
members who in turn would be responsible for appointing a district
superintendent.  Districts previously had used a variety of methods
to elect or appoint their local school officials. 


--------------------
\38 See earlier comment in the "Background" section of the letter
regarding the research that has examined the relationship between
school expenditures and student learning. 


      WIN-WIN SOLUTION NEEDED
------------------------------------------------------ Appendix IV:5.3

Another challenge entailed devising an equitable allocation system,
given that the state would not be at full funding for 6 years.  The
chair of the House Education Committee said that it was important to
show legislative members that, with the increase in state spending,
all districts, including large urban districts, were better off than
they would have been under the old finance system.  According to a
state education official, the solution entailed adopting a wage
adjustment factor developed by the state Department of Finance and
Administration to ensure that the large, urban districts received
more money under the new system compared with the old system.  Then,
because the money had to be phased in, the legislature chose to
distribute the new money according to how close a district was to its
full funding level.  The farther away a district was from full
funding, the more new money it proportionately received compared with
a district that was closer to its full funding level. 


   OFFICIALS CITE IMPROVEMENTS AS
   A RESULT OF THE CHANGE
-------------------------------------------------------- Appendix IV:6

During our visit, Tennessee was in its third year of phasing in the
Basic Education Program and was funding 88.1 percent of the fully
funded level, $1.9 billion, for fiscal year 1994-95.  Given this
funding history, benefits of the program cited most frequently by
officials we interviewed included improved equity in the funding of
poor districts compared with wealthy, greater educational
opportunities for all--and, particularly, poor--districts, more
flexibility in spending decisions at the local level, and the
introduction of a cost-based finance system.  District funding and
expenditure data obtained from the state also indicate that
inequities lessened since passage of the new finance program. 


      IMPROVED EQUITY IN
      EDUCATIONAL FUNDING
------------------------------------------------------ Appendix IV:6.1

Tennessee's Department of Education reports that the new school
finance system equalizes 94 percent of state funding to districts in
support of elementary and secondary education in fiscal year 1994-95
compared with 62 percent in fiscal year 1991-92 under the old system. 
The increase in the amount of equalized funds has reduced the
disparity in spending:  the Tennessee Advisory Commission on
Intergovernmental Relations reports that the disparity in per pupil
revenues as measured by how much larger the per pupil revenue in the
district at the 95th percentile is than the per pupil revenue in the
district at the 5th percentile has declined from 83.9 percent before
the enactment of the Education Improvement Act in 1992 to 73.6
percent after 1 year of Basic Education Program funding.  The
commission estimated that the disparity will fall to 36.1 percent by
1997, the year the Basic Education Program is fully funded. 

We found that plaintiff districts benefited to a greater extent than
the other districts under the new financing program.  In our analysis
of Tennessee school district funding data, we found that, the average
total funding per pupil in the 77 small, rural plaintiff districts
has increased.  In the fiscal year before the 1992 implementation of
the new finance program, the average total funding per student was
$2,476 in these districts.  In fiscal year 1994-95, the average was
$3,254, an increase of about 32 percent.  The remaining school
districts experienced a 23.10-percent increase in their average total
funding per pupil over that same period, with the average per pupil
funding increasing from $3,117 to $3,782. 

The Tennessee Department of Education has been keeping track of how
the additional funding made available under the Basic Education
Program has been spent.  In a 1994-95 budget report that accounts for
about $275 million of the new funding\39 under the program, classroom
expenditures represented about 80 percent of the new money. 
Classroom expenditures include the hiring of new personnel, such as
teachers, counselors, librarians, and principals, and the purchasing
of supplies such as textbooks, instructional materials, and
technologies.  Within this expenditure category, the largest single
portion (about $100 million) was spent on reducing class sizes in
kindergarten through eighth grade by hiring 2,999 new teachers. 
Nonclassroom expenditures accounted for the remaining 20 percent of
the new money, with about $25 million of the amount going for the
construction and renovation of classrooms. 


--------------------
\39 About 3 percent of the $275 million in new funding included
reserves from the prior year. 


      GREATER EDUCATIONAL
      OPPORTUNITIES, ESPECIALLY IN
      POOR DISTRICTS
------------------------------------------------------ Appendix IV:6.2

Nearly all the officials we interviewed indicated that the impact of
new money on small, rural districts has been significant.  A former
legislator said that an estimated 70 to 80 small, rural districts can
now provide educational opportunities to their students that they
could not offer before.  For example, he said that schools for the
first time have art and music teachers and can offer courses that
will better prepare their students for college.  These improvements,
in turn, will help enable such schools to receive accreditation from
the Southern Association of Colleges and Schools. 


      MORE LOCAL FLEXIBILITY
------------------------------------------------------ Appendix IV:6.3

The Tennessee Department of Education reported that the use of state
education funds has much more flexibility under the Basic Education
Program formula than it had under previous state funding programs. 
Officials we interviewed, including two legislators, a small district
superintendent, and a state school board association official, agreed
with the Department's assessment, citing flexibility in
decisionmaking as a benefit.  The funding formula groups components
of basic education into classroom and nonclassroom categories.  The
formula's only earmark is on classroom funds, which must be spent on
classroom components but not necessarily on the specific classroom
cost component that generated the funds.  As an example of the
flexibility possible in local spending decisions, a superintendent
said that district officials may receive funding to hire a nurse but
instead may decide to use the funds to hire a teacher or purchase
technology or some other classroom-related item. 


      COST-BASED FINANCE SYSTEM
------------------------------------------------------ Appendix IV:6.4

The old formula based its funding levels on appropriated amounts; the
new formula links funding to the costs of 42 critical components,
such as teachers and textbooks, associated with providing a basic
education.  The Department of Education annually reviews and updates
the components' costs.  One or both of these features--the inclusion
of a wide array of cost components and the annual review--were among
the benefits cited by officials we interviewed, including a Tennessee
State Education Board official, the Chair of the House Education
Committee, and representatives of the state teacher union and school
board association.  As the State Education Board official explained,
the state now has a mechanism for automatically increasing funding to
meet increasing enrollment and cost.  He explained that, previously,
funding for items, such as transportation, had remained the same for
a 6- to 8-year period, despite an approximate 33-percent increase in
the school enrollment. 


   CONCERNS REMAIN OVER SUSTAINING
   EQUITY IN FUNDING
-------------------------------------------------------- Appendix IV:7

Although acknowledging improvements, officials we interviewed also
identified several concerns about the new school finance system.  The
five concerns most frequently cited involved (1) the growing antitax
sentiment among property owners, (2) the exclusion of teacher salary
increases from the finance plan; (3) the lack of limits on local
contributions; (4) the high educational costs of poor, urban
students; and (5) the new accountability system. 

Because of a lawsuit, the state has since modified its finance system
to include increases in teacher salaries.  Depending on how concerns
about the antitax sentiment, the lack of limits on local spending,
and the needs of the urban poor are handled, some officials indicated
that inequities in the school finance system could recur. 


      ANTITAX SENTIMENT A GROWING
      CONCERN
------------------------------------------------------ Appendix IV:7.1

Given that localities are required to pay a prorated share toward the
cost of their district's basic education, officials we interviewed
questioned the willingness of localities to raise their taxes to keep
pace with the cost of components, such as teacher salaries, that are
expected to increase over time.  As a state school board official
explained, the Education Improvement Act required schools to comply
with reduced class sizes 4 years from the date of full funding for
the new school finance plan.  This provision, he said, will create
significant upward pressure on localities' contributions, and
counties will be dismayed when they learn how much they will need to
contribute to earn the state share.  A state board of education
official said that, as a result, constituents would pressure their
state representatives to change the formula to avoid raising taxes to
finance their local contribution.  If the local share were to be
reduced, the official said the state may find it more difficult to
ensure the adequate and equitable financing of education needs in all
districts. 


      PROGRAM'S FAILURE TO
      INCREASE TEACHERS' SALARIES
      CHALLENGED
------------------------------------------------------ Appendix IV:7.2

The Tennessee Small School Systems representing the 77 small, rural
districts who had filed the original 1988 lawsuit brought suit
challenging the provision in the Education Improvement Act that new
funding under the Basic Education Program could not be used to
increase salaries of existing teachers.  The plaintiffs contended
that the new funding scheme was unconstitutional because equalization
would occur over several years and the plan included no provision to
equalize or increase teacher salaries.  In its February 1995 opinion,
the state supreme court upheld the plan's constitutionality,
accepting the state's argument that complete equalization of funding
can best be accomplished incrementally but found that the plan's
failure to provide for the equalization of teachers' salaries was a
significant defect which, if not corrected, could put the entire plan
at risk.  The court stated, "Teachers, obviously, are the most
important component of any education plan or system, and compensation
is, at least, a significant factor determining a teacher's place of
employment." Underscoring the importance of the program's key
provisions for funding and governance, the court approved Tennessee's
Basic Education Program.  Since the court order, the 1995 Tennessee
State Legislature has appropriated $7 million of the estimated $12
million needed to equalize increases in teacher salaries. 


      NO LIMITS ON LOCAL SPENDING
      POSE A CONCERN
------------------------------------------------------ Appendix IV:7.3

Although the Education Improvement Act mandates a minimum local
contribution, it does not limit the amount of the contribution.  A
superintendent of one of the plaintiff districts stated, "To impose
caps to limit local taxing authority in the name of equality or
uniformity of education has no place in a new [finance] system."
Other officials--including a state attorney and a state legislator,
however, suggested that some districts may be very willing to
contribute to their local schools, and over time disparities between
rich and poor districts may again grow to some unacceptable level. 


      EDUCATIONAL NEEDS OF URBAN
      POOR MAY NOT BE MET
------------------------------------------------------ Appendix IV:7.4

Officials, including two state education officials and a state
attorney, indicated that the Basic Education Program formula may not
adequately address the needs of the urban poor who reside in counties
with high fiscal capacities.  An official with the Tennessee Advisory
Commission on Intergovernmental Relations said that the formula makes
no allowances for the likely higher-than-average unit costs
associated with serving the educational needs of a large, dense
population of students--many of whom can be characterized as poor or
at risk--in the urban districts.  Compounding the problem of not
receiving perhaps adequate funding for their students' educational
needs, he also said that urban districts have relatively high fiscal
capacities and therefore their state funding increases have been
proportionately smaller compared with the increases in districts with
lower fiscal capacities, which are typically more rural.  Finally,
the state does not have any requirement for counties to "weight" the
distribution of state or local funds to their school districts
according to the district's share of poor or at-risk students in the
county. 


      SOME ACCOUNTABILITY
      PROVISIONS CONTINUE TO BE
      CHALLENGED
------------------------------------------------------ Appendix IV:7.5

Officials we interviewed expressed concern about the reaction of
groups affected by certain accountability provisions in the Education
Improvement Act.  For example, the Chair of the House Education
Committee said that members of the legislature have made repeated
attempts to repeal provisions related to the election of school board
members and the board appointment of district superintendents.  The
provisions in Tennessee's pioneering new approach for measuring gains
in student performance--the Value Added Assessment System--also
sparked controversy.  The new assessment system measures gains in
student performance in grades three to eight and compares them with
national average gains in those grades over the most current 3-year
period.  Observations made by officials, including two state
education officials, a legislator, a teacher union representative,
and a district superintendent indicated that the new system is
problematic--although a key legislator said he believed the problems
can be worked out.  Problems cited by respondents in our group
included (1) difficulties in holding schools accountable for
achieving certain performance goals before the Basic Education
Program is fully funded; (2) premature student testing--that is,
conducting tests before students have had an opportunity to learn the
material; and (3) bad publicity caused by early results that only
showed small increases in better schools. 


MINNESOTA CASE STUDY
=========================================================== Appendix V

In 1988, 52 school districts with below-average property wealth sued
the state of Minnesota for providing--in alleged violation of the
state constitution--unequal access to education revenue and unequal
education opportunities.  Unlike some other states, about 90 percent
of Minnesota's education revenues were already subject to wealth- and
need-based equalizing formulas.  At issue was about 7 percent of
general education revenue for elementary and secondary education. 

Although the Minnesota Supreme Court ruled in 1993 that the finance
system was constitutional, the Minnesota State Legislature moved
forward with plans to equalize some of the remaining funding.  To do
so, legislators had to balance three competing interests:  (1)
increasing funds available to less wealthy districts, (2) dealing
with growing pressures for tax relief from business and other
property owners, and (3) assuaging the concerns of high-spending
districts that they might lose revenue because of changes to the
system. 

The legislature's revisions have improved the fairness of the system,
according to almost all the officials and education advocates we
interviewed.  However, issues that have emerged since the
revisions--districts' ability to pass tax levies in an antitax
environment and the rapidly growing costs of educating children with
special needs--have created additional problems that may raise new
concerns about finance equity. 


   BACKGROUND
--------------------------------------------------------- Appendix V:1

We determined that in fiscal year 1995-96, public school districts in
Minnesota were projected to receive more than $5.5 billion from
federal, state, and local sources.  More than half of that was
provided by the state, and about 44 percent was provided by
localities.  The federal government contributed the rest.  Since
fiscal year 1986, Minnesota has spent more on primary and secondary
education than it has on any other single major state program,
amounting to about one-third of most recent state expenditures. 
Since 1983, the state's share of total district revenue, relative to
local and federal contributions, has dropped below 50 percent only
once and has been as high as 55 percent.  State appropriations for
public schools are funded primarily by statewide income and sales
taxes.  The local contribution is funded primarily with local
property taxes. 

Understanding how Minnesota funds education helps to better explain
the pursuit of revenue equity in the state and how it differs from
such pursuits in states where much wider disparities existed. 
Elementary and secondary schools receive the bulk of their general
operating funds and levy authority from the state through the General
Education Revenue Program, a program subject to wealth equalizing
formulas.  Nearly three-fourths of the total state funding for
elementary and secondary education is distributed to school districts
through this program.  The remaining one-fourth of the state's
appropriation is for special-purpose or categorical aids, some of
which also are wealth and cost based. 

The General Education Revenue Program entitles each district to a
specified revenue allowance per pupil, with additional allowances
allocated on the basis of economic, geographic, and other
cost-related circumstances of the district.  The "basic revenue
allowance," without the cost-related adjustments, was $3,150 per
pupil unit\40 in fiscal year 1995-96.  The state pays the district
the difference between what a district can raise at a statewide tax
rate\41 and its basic revenue allowance.\42 The proportion of general
education aid received by each district depends on the district's
relative property wealth per pupil.  A few very wealthy districts
receive no general education aid, while relatively poor districts
receive most of their general education revenue as state aid
payments. 

In addition, districts may also supplement this basic funding by
implementing a voter-approved operations tax levy.\43 Revenue raised
by voter-approved operations levies constituted about 6 percent of
total district revenue in 1994.  The optional operations tax levy was
at the heart of the dispute about funding equity. 


--------------------
\40 Per pupil unit is a weighted count of resident pupils in average
daily membership used in the calculation of state aid and local tax
levies. 

\41 During our visit, this rate was 34.2 percent of taxable property
wealth. 

\42 At the statewide tax rate, a few property-rich districts raise
levies in excess of the general education allowance.  The amount by
which the general education levy exceeds the general education
allowance is deducted from other categorical aid to the district.  A
few districts raise more than their total general education allowance
plus categorical aids.  These districts are allowed to reduce their
tax rate and receive no state aid. 

\43 The state calls this "excess referendum revenue."


   DISPARITIES IN SPENDING AND
   UNEQUAL ACCESS TO REVENUE
   PROMPT 1988 LAWSUIT
--------------------------------------------------------- Appendix V:2

As in Texas and Tennessee, a lawsuit prompted action to revise
Minnesota's finance system.  The suit was brought in 1988 by rapidly
growing school districts whose property wealth per pupil had dropped
below the state average.  The suit alleged that the education finance
system violated two provisions of the state constitution:  its
education clause (which requires a "general and uniform system of
public schools") and its equal protection clause (which provides that
a citizen may not be deprived of any right or privilege).  This
challenge was to a relatively small portion of Minnesota's funding
structure because more than 93 percent of Minnesota's general
education revenue already fell under wealth- and cost-based funding
schemes.  Plaintiffs contended that the failure to equalize the
remaining 7 percent of this revenue left too much discretion with
local officials and permitted wealthy districts to generate much more
additional funding than low- or average-wealth districts.  The
lawsuit challenged three types of state funding programs:  (1)
voter-approved operations tax levy; (2) revenue guarantees typically
benefiting high-spending, wealthy districts; and (3) local debt
service levy approved by voters to finance bonds for school
construction and renovation. 

The court found that the constitutional requirement for a "general
and uniform system" of public schools does not mandate complete
funding equalization and that any inequities that existed did not
actually violate the constitution's education clause.  Nevertheless,
the legislature continued to implement revisions it had begun in 1991
to further reduce the disparities between wealthy and less wealthy
districts. 


   LEGISLATORS BALANCE COMPETING
   INTERESTS TO ACCOMPLISH LEVY
   EQUALIZATION
--------------------------------------------------------- Appendix V:3

To improve fiscal equity in Minnesota, legislators said they found
they had to balance three competing interests:  (1) increasing funds
available to low-property wealth districts, (2) dealing with growing
pressures for tax relief from business and other property owners, and
(3) assuaging the concerns of high-spending districts that they might
lose revenue because of changes to the system. 


      LEGISLATURE EQUALIZES
      OPTIONAL LEVY PROGRAMS
------------------------------------------------------- Appendix V:3.1

Unlike other states, where legislatures made significant structural
changes to the school finance system to affect equity, the Minnesota
State Legislature made minor changes within the existing system,
education leaders and state officials said.  Legislative revisions
principally focused on voter-approved operations and debt service
property tax levies.  Beginning in 1992, state aid was provided to
equalize a portion of the optional operations tax levies.  It also
began debt service equalizing aid that year. 

The state's tactic to improve equity in the levy programs was to
calculate an aid contribution per district in the same manner as it
calculated the state's share of the district's General Education
Revenue.  Equalizing aid was provided to districts passing levies in
a proportion similar to that received by them under the equalized
General Education Revenue program.  State aid was provided to
equalize a portion of the optional levy.  Initially, only $305 per
pupil unit raised by the voter-approved operations tax levy was
subject to this equalizing scheme.\44 The debt service levy
equalization aid was phased in over 3 years, at a lower rate of
equalization than operations levies, and was made available only to
districts whose debt service exceeded 10 percent of their taxable
base per pupil.  The need to provide additional revenue for some
districts was complicated by other pressures on the state budget,
according to one former member of the education finance committee in
the Minnesota House of Representatives.  When these changes were
being considered, the state also had growing health care costs due to
expanded coverage and enrollment growth and growth in corrections
costs due to harsher sentences and improved law enforcement.  We
found that health care spending increased over 47 percent between
fiscal years 1988 and 1991.  Corrections spending was up almost 42
percent in the same period. 


--------------------
\44 According to state law, this amount is 10 percent of the basic
revenue allowance, or $305 of $3,050 in 1992.  In 1994, the allowance
increased to $3,150 and the maximum guarantee increased to $315. 


      LEGISLATION PROVIDES TAX
      RELIEF
------------------------------------------------------- Appendix V:3.2

State legislative officials and education advocates said that
education finance negotiations included pressures from business
interests and tax reformers who wanted to make property tax relief
part of education finance reform.  Of interest to business was the
state's property tax system, which taxed different types of property
used for different purposes at significantly different rates.  The
lowest tax rates were applied to agricultural property.  The highest
rates were applied to commercial property.  Business leaders, whose
commercial property could be taxed at more than four times the lowest
residential homestead property rate, wanted changes.  In addition,
one group sought to cap statewide property tax rates for operations
levies.  State law did not limit tax rates for optional levies. 

To deal with these concerns, legislators made several changes. 
Initially, these changes included the following:  They voted to
terminate all operations levy authority by July 1, 1997, forcing
districts to go back to the voters for any renewal.  In addition,
they limited all operations levies to 5-year terms.  Specifically to
respond to business concerns about tax fairness, the legislature
began to phase in a market value-based property tax system for
optional operations levies.  After 1997, commercial property was to
no longer be taxed at a higher rate than homestead and other
property.  Finally, the legislature capped the amount of optional
operations levy revenue that a district could raise.  In effect, this
limited districts' property tax rates for optional operations levies,
which had not previously been limited by state law.  Initially, the
revenue limit was set at 35 percent of the basic revenue allowance
but was further reduced to 25 percent in 1993. 


      LEGISLATION PROTECTS
      DISTRICT REVENUES
------------------------------------------------------- Appendix V:3.3

Members of the legislative committee addressing education finance
issues said some high-spending districts were concerned that
revisions to the finance system might reduce their revenue, create
fiscal hardship, and harm the quality of their education programs. 
These districts sought revenue protections and were supported by
their legislators. 

For example, most districts' optional operations levy revenue was
below the statutory limit, though a few districts exceeded the limit,
legislative officials said.  Districts located in sparsely populated
areas were not subject to revenue limits.  In addition, suburban
metropolitan districts experiencing declining enrollment were allowed
to retain their excess revenue.  Additional protective measures that
the legislature passed were to postpone the statutory expiration date
for optional operations levies from 1997 to 2000, and to extend the
5-year term limit on newly passed levies to 10 years.  Districts have
options to extend these levies further if they convert their levies
to a market-value base. 

The legislature also continued a state revenue program specifically
challenged as unfair by plaintiff districts in their equity suit
against the state.  This program guarantees districts revenue that
might otherwise have been reduced due to changes in the school
finance system.  One legislative fiscal analyst said that it is
unlikely this program will be eliminated, although funding is being
reduced, because a handful of districts greatly depend on these
dollars. 


   FINANCE REFORMS IMPROVE EQUITY,
   BUT OTHER PROBLEMS EMERGE
--------------------------------------------------------- Appendix V:4

Legislative and education officials and education advocates generally
agreed that equalizing optional property tax levies had made the
finance system fairer.  However, education leaders in particular said
that several additional problems have emerged since the revisions and
these problems remain unresolved. 


      REVENUE EQUITY IMPROVES
------------------------------------------------------- Appendix V:4.1

Legislative and education officials and education advocates generally
agreed that the new equalizing levy aid program has moved the state
closer to a finance system in which equal tax effort generates equal
revenue per pupil unit among districts.  For example, we found that
the differences in relative tax burden between the state's highest
property wealth and lowest property wealth districts has diminished
since the 52 school districts filed suit in 1988.  According to a
document prepared by plaintiff districts, the tax rate for the
poorest districts was on average almost one-fourth higher than that
for the wealthiest districts.\45

By 1992 and 1993, however, we determined, on the basis of State
Department of Education data, that this disparity had diminished to
just over 6 percent. 

Furthermore, we also determined that in 1988 a less wealthy district
falling at the 10th percentile generated expenditures of $59.57 per
pupil for every percent of tax levied, compared with $84.98 per pupil
for every percent of tax levied in a wealthy district at the 90th
percentile.  By 1992 and 1993, however, the per pupil expenditures
for every percent of tax levied were essentially equal in two
districts falling at the 10th and near the 90th percentiles in
wealth.  A less wealthy district generated $129.58 in expenditures
per pupil for every percent of tax levied compared with $132.25 per
pupil in a wealthy district. 

Differences in spending, which the state supreme court found were
largely justified by differences in operating costs and pupil needs,
have not changed significantly since 1988.  In 1992-93, the district
at the 95th percentile in per pupil operating expenditures was
spending 54 percent more than the district of the 5th percentile. 
The disparity surpassed that in 1988, when the difference was 48
percent per pupil.  The legislature has required, however, that if
the spending gap between the districts at the 5th and 95th
percentiles in general education revenue begins to increase
significantly, the state Department of Education will devise a plan
to reduce that growth and recommend that plan to the legislature. 


--------------------
\45 The Association of Stable or Growing School Districts, Factual
Issues Addressed and Answered by Court Decision in Funding Equity
Lawsuit, Minneapolis, undated. 


      ANTITAX SENTIMENT AND
      INCREASING EDUCATION COSTS
      CREATE ADDITIONAL PROBLEMS
------------------------------------------------------- Appendix V:4.2

State education leaders pointed out two problems that have emerged
since equalizing legislation was introduced for optional levies. 
These problems, which concern public support for taxes and growing
education costs, may affect state efforts to achieve improved finance
equity.  First, voter resistance to taxes is growing.  As a result,
fewer districts can pass optional levies, officials said.  For
example, voters in one such district near St.  Paul twice rejected
the renewal of an existing optional operations levy in 1994.  The
loss of about $350 per pupil unit caused the district to lay off
about 70 teachers in 1995, the superintendent said.  Voter discontent
with taxes overall and the property tax in particular affected the
outcome of the referendum, he said.  According to one state finance
official, no real growth has occurred in the proportion of districts
statewide passing operations levies.  This has occurred while the
state has increased equalizing aid for districts passing levies.  The
ability of some districts to pass levies, when other districts
cannot, will affect spending disparities in the state, education
advocates said. 

The second emerging problem is that the number of special needs
students requiring costly special education programs is creating
fiscal pressures statewide, state officials and education advocates
said.  While state appropriations for the basic revenue allowance
have increased only 10 percent between 1991 and 1995, aid for
remedial education, special education, and limited English
proficiency are up 75 percent, 103 percent, and 37 percent,
respectively.  Several people we interviewed said that, although the
state has increased aid for special needs children, aid has not kept
up with the costs of educating them. 

The director of the organization representing the 52 school districts
that brought the 1988 suit said that some districts have been hit
harder by this growing population than others.  For example, we
determined that the Osseo School District in school year 1987-88 was
spending $277 per pupil on special education services, but by
1992-93, its special education spending had almost tripled to $766
per pupil.  Another district struggling with increasing costs has
been the Minneapolis School District, where a large proportion of the
children enrolled are from economically disadvantaged backgrounds and
are of ethnic minorities.  During our visit, this district was
considering another lawsuit against the state.  Even though the
district has among the highest tax bases in the state and spends more
per pupil than 95 percent of the state's districts, it is not enough,
a policy official with the district said.  Academic achievement by
minority students has been below national averages. 

Education advocates pointed out that state aid to districts reflects
the amount of money the state has available to fund education, rather
than the cost of providing it.  Although the legislature established
a commission in 1993 called the Coalition for Education Reform and
Accountability to both define and estimate the cost of ensuring a
"basic education," the legislature has not acted on the coalition's
assessment and recommendations.  The legislature did not renew the
coalition's funding in 1995.  Legislative and education officials
said the coalition defined "basic education" very broadly and
indicated that a significant increase in education spending by the
state would be required.  Given existing budgetary constraints, it is
unlikely that the coalition's recommendations will be implemented,
state finance officials said. 


GAO CONTACTS AND ACKNOWLEDGMENTS
========================================================== Appendix VI

GAO CONTACTS

Eleanor L.  Johnson, Assistant Director, (202) 512-7209
Barbara Billinghurst, Evaluator-in-Charge, (206) 287-4867

STAFF ACKNOWLEDGMENTS

D.  Catherine Baltzell, Supervisory Methodologist, provided valuable
technical advice on study design; Nancy Purvine, Evaluator, led the
case study of Texas and coauthored the report; Virginia Vanderlinde,
Evaluator, led the case study of Minnesota and coauthored the report;
Mary Reich, Attorney-Adviser, and Dayna Shah, Assistant General
Counsel, provided legal advice; and Stanley H.  Stenersen, Reports
Analyst, facilitated the organization and writing. 


*** End of document. ***