School Finance: State Efforts to Equalize Funding Between Wealthy and
Poor School Districts (Chapter Report, 06/16/1998, GAO/HEHS-98-92).

Children from poor families or living in poor neighborhoods have less
chance of succeeding in school. In addition, poor communities often lack
the tax base, even with high tax rates, to provide enough revenue for
their education programs. GAO found that two key factors can help reduce
the size of the funding gap between poor and wealthy schools districts:
(1) the extent to which a state's poor districts make a greater tax
effort than the wealthy districts and (2) a state's efforts to
compensate for differences in district wealth through its equalization
policies. Poor districts in most states made a greater tax effort than
did the wealthy districts, according to GAO's research. GAO determined
the equalization efforts of 49 states in school year 1991-92. The most
equalized school finance system would enable districts' per pupil
funding to be 100 percent of the state's average per pupil funding for
an equal tax effort in all districts. The average state equalization
effort was 62 percent, according to GAO's analysis. States ranged from a
high of 87 percent in Arkansas and Kentucky to a low of about 13 percent
in New Hampshire. Increased equalization efforts in the four states GAO
reviewed in detail--Kansas, Louisiana, Oregon, and Rhode Island--showed
mixed results in reducing the funding gaps between poor and wealthy
districts. To more effectively reduce disparities in education spending
in rich and poor school districts, most states would have to fund a
larger portion of local education expenses or target more money to poor
districts. To maintain equalized spending, states may also have to
impose controls over local taxes to prevent districts from perpetuating
gaps by adjusting taxes.

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

 REPORTNUM:  HEHS-98-92
     TITLE:  School Finance: State Efforts to Equalize Funding Between
	     Wealthy and Poor School Districts
      DATE:  06/16/1998
   SUBJECT:  Aid for education
	     Disadvantaged persons
	     Public schools
	     School districts
	     Secondary education
	     Elementary education
	     State/local relations
	     Municipal taxes
	     State aid
IDENTIFIER:  Oregon
	     Kansas
	     Rhode Island
	     Louisiana
	     Dept. of Education Impact Aid Program

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GAO/HEHS-98-92

Cover
================================================================ COVER

Report to Congressional Requesters

June 1998

SCHOOL FINANCE - STATE EFFORTS TO
EQUALIZE FUNDING BETWEEN WEALTHY
AND POOR SCHOOL DISTRICTS

GAO/HEHS-98-92

State Equalization Efforts

(104867)

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

  BESE - Board of Elementary and Secondary Education
  CCD - Common Core of Data
  ESEA - Elementary and Secondary Education Act of 1965
  EWAV - equalized weighted assessed valuation
  LOB - local option budget
  NCES - National Center for Education Statistics

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

B-278363

June 16, 1998

The Honorable Jeff Bingaman
The Honorable Christopher Dodd
The Honorable Carol Moseley-Braun
United States Senate

Children from poor families or living in poor neighborhoods have less
chance of succeeding in school.  In addition, poor communities often
lack the tax base to provide enough revenue for their education
programs, even with high tax rates.  To compensate for the adverse
effects of poverty on student achievement, the federal government has
funded title I and other education services for low achievers in poor
areas through specially targeted programs.  This federal effort
supplements the much larger role that state and local governments
play.

Many states recognize the high cost of educating poor students and
the struggle of poor districts to adequately fund the needs of those
students.  In a recent report\1 done at your request, we examined how
state and federal governments target money to poor students.  All
types of districts, however, have poor students--districts with
little taxable wealth (poor districts) as well as those with much
taxable wealth (wealthy districts).  Therefore, you asked us to
review how well state funding is targeted to poor school districts.
This report responds to your request.

This report was prepared under the direction of Carlotta C.  Joyner,
Director, Education and Employment Issue Area, who may be reached at
(202) 512-7014 if you or your staff have any questions.  Other major
contributors to this report are listed in appendix VII.

Richard L.  Hembra
Assistant Comptroller General
Health, Education, and Human Services Division

--------------------
\1 School Finance:  State and Federal Efforts to Target Poor Students
(GAO/HEHS-98-36, Jan.  28, 1998).

EXECUTIVE SUMMARY
============================================================ Chapter 0

   PURPOSE
---------------------------------------------------------- Chapter 0:1

Disparities in funding for education between poor and wealthy
districts--
known as funding gaps--have resulted in lawsuits in more than 40
states since 1970 that have challenged the constitutionality of state
finance systems.  Most school funding is provided by states and
localities.  Local school districts, however, differ inherently in
the amount of local funding they can raise because they vary in the
(1) value of property or other wealth they are allowed to tax and (2)
willingness of residents to tax themselves to support education.
Because of the wide variations in local funding, most states provide
funds that help reduce these funding gaps.  Even after accounting for
state funding, however, wealthy districts, on average provide 24
percent more funding per pupil than poor districts.  This occurs even
though people in most poor districts tax themselves at higher rates
than those in wealthy districts.

States play the leading role in equalizing funding among school
districts.  The federal government plays a more limited role using
incentives provided in the Improving America's Schools Act of 1994 to
encourage states to equalize funding.  To better understand states'
accomplishments in equalizing educational funding among school
districts, several senators asked GAO to address the following
questions:  (1) What factors contribute most to reducing the size of
the funding gaps between poor and wealthy school districts?  (2) How
have funding gaps between poor and wealthy districts been affected in
states that have recently changed their approach to providing state
equalization aid?  and (3) What kinds of changes are needed for
states to more fully address these funding gaps?

   BACKGROUND
---------------------------------------------------------- Chapter 0:2

The United States has about 16,000 school districts, and most raise
local funds for education through property taxes.  Disparities in
funding due to wide variations in districts' ability to raise revenue
have led to lawsuits challenging the constitutionality of school
finance systems in more than half of the states since 1990.  In many
states, courts have declared that these finance systems violate the
state constitution and have directed legislatures to make funding
more equitable, that is, to equalize funding.  In the process,
although specific requirements have varied, many courts have thus
defined an equitable education as well as set guidelines for
improving state finance systems.

Although states have played the leading role in equalizing school
funding, the federal government has encouraged more equalized funding
among a state's school districts through two programs of the
Improving America's Schools Act of 1994.  The first program, the
title VIII Impact Aid program, allows states to reduce funding to
districts that receive impact aid if the state has been certified by
the Department of Education as achieving a certain degree of equity.
The second program, the title I Education Finance Incentive program,
allocates a portion of the title I appropriation on the basis of
state fiscal effort and funding equity.\2 This provision, however,
has not yet been funded.

The incentive structure in both federal programs uses performance
measures that focus on the size of funding gaps, not on state efforts
to equalize funding.  The Congress has become increasingly concerned
with measuring the results of federal programs, a recent example of
which is its passage of the Government Performance and Results Act.
One of the Results Act's most important features is the incorporation
of performance measurement.  Leading organizations recognize that
performance measures can create powerful incentives to influence
organizational and individual behavior.

Federal funds help narrow the funding gap because they are targeted
to poor students, some of whom live in poor districts.  As GAO
reported in its study of targeting to poor students, although federal
dollars make up only about 7 percent of the total national funding
for elementary and secondary education, the effect of adding federal
funds to state funds increased the targeting of funds to poor
students by 77 percent.  Moreover, about 64 percent of the nation's
poor children attended public schools in 21 states that had
significant funding gaps between poor and wealthy districts,
according to this study.  To the extent that poor students live in
poor districts, this targeting to poor students helps to reduce the
effect of tax base disparities among school districts.

GAO's analysis of state efforts to equalize education funding
included every state except Hawaii\3 and was based on 1991-92 school
year data, the most recent year for which national data were
available.  A phone survey of states showed that half of them
reported little or no changes to their finance systems.\4 GAO's
analysis of changes in state finance systems focused on four states
(Oregon, Kansas, Rhode Island, and Louisiana), using state-reported
data for school years 1991-92 and 1995-96.  GAO chose these states
because they represent a wide variety of school finance approaches.

GAO conducted its work between November 1996 and May 1998 in
accordance with generally accepted government auditing standards.

--------------------
\2 The Department of Education defines fiscal effort as education
spending as a percentage of per capita income; funding equity is
measured by computing the variation in per pupil expenditures across
school districts.

\3 Hawaii was excluded because the GAO analysis compares funding
among districts within a state, and Hawaii has only one school
district.

\4 GAO surveyed 49 states to assess what changes had taken place in
state funding and federal funding from school years 1991-92 to
1995-96.  Thirty-one states reported no changes in targeting that
resulted in providing more funds to high-poverty districts.
Thirty-six states reported little or no change in the state's share
of education funding, another factor that could affect funding
equalization.  For details, see appendixes LIV and LV in School
Finance:  State and Federal Efforts to Target Poor Students
(GAO/HEHS-98-36, Jan.  28, 1998).

   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Two key factors help reduce the size of the funding gap between poor
and wealthy districts:  (1) the extent to which a state's poor
districts make a greater tax effort than the wealthy districts and
(2) a state's effort to compensate for differences in district wealth
through its equalization policies.  Poor districts in most states
made a greater tax effort than the wealthy districts, according to
our research.  Characterizing state equalization efforts is much more
complex, however, than analyzing districts' tax efforts.  A state's
equalization effort consists of two parts:  the proportion of
education funding financed by the state government (state share) and
the degree to which states target funds to poor districts.  Of these
two, state share has more impact on state equalization policies.  In
effect, equalization policies determine the extent to which a state
enables its districts to provide the state average funding level when
all districts make an equal tax effort.  The most equalized school
finance system would enable districts' per pupil funding to be 100
percent of the state's average per pupil funding for an equal tax
effort in all districts.  GAO determined the equalization effort of
49 states in school year 1991-92.  The average state equalization
effort was 62 percent, according to GAO's analysis.  States ranged
from a high of 87 percent in Arkansas and Kentucky to a low of about
13 percent in New Hampshire.

Increased equalization effort in the four states GAO reviewed in
detail showed mixed results in reducing funding gaps between poor and
wealthy districts.  After revising their school finance systems, both
Oregon and Kansas reduced the funding gap between poor and wealthy
districts.  In contrast, Louisiana's funding gaps increased and Rhode
Island's stayed about the same because changes in the local tax
effort offset a greater state equalization effort.

To more successfully address funding gaps, most states would have to
increase state equalization effort and impose some constraints on
local tax efforts.  The amount of money required to reduce these
funding gaps and the type of constraints needed depend on the degree
to which a state may want to reduce the gap and the degree to which a
state wants to equalize the local tax burden among districts.  In any
case, substantial reductions in funding gaps would require sizeable
funding increases in many states.  Oregon, for example, reduced the
gap largely because it increased the state share of education funding
by roughly three-fourths.  Many states would have to make changes of
this magnitude to achieve similar results.

States intervening to reduce funding gaps between poor and wealthy
districts face difficult choices about controlling local tax behavior
and equalization effort.  Among the most difficult are politically
sensitive decisions about local tax choice--whether to leave it
unconstrained or to require specific local behaviors (maintenance of
effort, equal tax effort, or a minimum tax effort).  The easiest
choice is not to control local tax behavior, but this may undermine
equalization efforts.  GAO found that without constraints on local
funding, districts in Louisiana and Rhode Island adjusted their tax
effort in a way that undermined increases in the state's equalization
effort.  In Louisiana, the funding gaps actually worsened; in Rhode
Island, they stayed about the same.  Regarding equalization effort, a
state could choose to increase its share of total education funding,
increase its targeting effort so that state aid would favor poor
districts to a greater extent, or increase both.  Relying mainly on
increasing its share of total funding would allow a state to bear
most costs involved with increasing equalization effort.  Relying
instead on increased targeting shifts some of the costs to wealthier
districts.  This is because without increasing state share, wealthy
districts would get less money from the state and might have to
contribute locally raised revenue to the state for redistribution to
poor districts.

   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4

      LOCAL TAX AND STATE
      EQUALIZATION EFFORTS AFFECT
      FUNDING GAPS
-------------------------------------------------------- Chapter 0:4.1

Of the two key factors affecting funding gaps--local tax effort and
state equalization effort--GAO's data analysis demonstrates that the
larger tax effort of poor districts compared with that of wealthy
districts contributed more to reducing funding gaps than did state
equalization efforts in school year 1991-92.  Poor districts made a
much greater tax effort than wealthy districts.  Differences in poor
and wealthy districts' tax efforts result from district residents'
tax choices, which may be affected by state and local policies
governing these choices.  In 35 states, poor districts made a greater
tax effort than wealthy districts.  In nine of these states, this
greater effort helped close the funding gap; three states--Iowa,
Kansas, and Wyoming--achieved this result with an equalization effort
that was less than the national average.  In the remaining 26 states,
however, the poorer districts' greater tax efforts could not offset
wealthier districts' funding advantage.  Poor districts' extra effort
ranged from 106 percent as much as wealthy districts in Delaware to
over four times as much in Wyoming (417 percent).

States can apply an infinite combination of state shares and
targeting policies to achieve a certain level of equalization effort.
Although the average state equalization effort was 62 percent of what
was possible in school year 1991-92--states ranged from a high of 87
percent in Arkansas and Kentucky to a low of about 13 percent in New
Hampshire--state equalization efforts overall still helped to reduce
the funding gaps, according to GAO's analysis.

      CHANGES IN EQUALIZATION
      POLICY PRODUCED MIXED
      RESULTS IN FOUR STATES
      STUDIED
-------------------------------------------------------- Chapter 0:4.2

GAO studied four states that reported changing their school finance
systems between school years 1991-92 and 1995-96.  These states
increased the proportion of state funding or targeting to poorer
districts and made changes to their finance system that affected
local districts' tax effort.  The funding gaps among districts
declined in Oregon and Kansas, widened in Louisiana, and stayed about
the same in Rhode Island.

In Oregon, voters mandated statewide property tax relief and
established a maximum tax rate for district operating revenue.  This
decreased local funding, particularly for wealthy districts.  The
state reacted by increasing its share of education funding from 30 to
59 percent.  Part of the increase in state funding offset the
resulting reduction in all districts' local revenue.  The poorest
districts, however, had a greater increase in total revenue than the
wealthiest districts.  Consequently, the funding gap between poor and
wealthy districts declined.

In Kansas, the legislature set a statewide property tax rate for
financing districts' base budgets.  In addition, the state increased
its share of total funding from 42 percent in school year 1991-92 to
59 percent in school year 1995-96.  The mandated property tax rate
provided tax relief in most districts, while raising tax rates for
some of the wealthiest districts where the mandated tax rate
increased the amount of local revenue raised.  To keep disparities in
funding among districts from growing larger as a result, the state
also capped the amount of local funding the wealthiest districts
could keep and redistributed excess local revenue to less wealthy
districts.  As a result of these steps, Kansas succeeded in reducing
the funding gap.

Louisiana increased its equalization effort by targeting more state
funding to poorer districts.  Rhode Island did so by slightly
increasing the state share of education funding.  The funding gap
between poor and wealthier districts, however, did not decrease in
these states in part because additional state funding provided poor
districts with an opportunity to reduce relatively high tax rates
compared with those of the wealthy districts.  In addition, wealthier
districts in Louisiana raised local taxes more than enough to replace
what they had lost in state funding.

      REDUCING THE FUNDING GAP
      WOULD REQUIRE STATES TO MAKE
      DIFFICULT CHOICES
-------------------------------------------------------- Chapter 0:4.3

Any enhancement of a state's equalization effort would tend to
improve access to funding in poor districts because it would increase
the amount of total (state and local) funding available for their tax
effort.  The experiences of the four case study states, however,
indicate that increased equalization efforts alone may not be enough
to reduce funding gaps.  Without constraints on local tax efforts,
increases in states' equalization efforts may prompt districts to
adjust their tax effort in a way that undermines the equalization
effort.  As in Louisiana, funding gaps may actually worsen with an
increased equalization effort.

As a result, states would probably have to enact policies that
present significant political and budgetary challenges.  Because
poorer districts may offset gains in state aid by reducing their tax
effort and wealthier districts may offset losses in state aid by
increasing theirs, states may need to consider whether their effort
to reduce funding gaps should include constraints on local tax
choices.  Such constraints could include mandating districts to
maintain their existing (and often unequal) tax effort or mandating
districts to equalize their tax efforts.

Regardless of which tax constraint a state might choose, a state
wanting to reduce its funding gap would need to increase its
equalization effort--
either by increasing state share, increasing state targeting, or
increasing both.  An increased equalization effort combined with a
tax constraint that equalized tax efforts among districts would be
the most costly approach to reducing funding gaps, according to GAO's
analysis.  An increased equalization effort combined with a tax
constraint that maintained existing efforts would also be costly,
however.  For example, GAO's analysis of this second approach using
school year 1991-92 funding data revealed that to eliminate funding
gaps given the state shares of total funding that year, half the
states would have had to increase their targeting by at least 200
percent.  Alternatively, if states held their targeting steady, half
would have had to increase their share of funding by about 50
percent.

To encourage states to increase their equalization efforts, federal
programs could measure the strength of the state's equalization
effort in reducing the funding gap rather than just measuring the
size of the funding gap.  Measuring the size of funding gaps alone
might reward states whose funding gaps are small because poor
districts made an extraordinary tax effort rather than because the
state made a substantial equalization effort.  Federal policy could
use performance measures that focus explicitly on a state's
equalization effort in addition to, or in place of, measures focusing
on funding gaps.

   MATTER FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 0:5

If the federal government wants to encourage greater state
equalization effort to reduce funding gaps between poor and wealthy
districts, then the Congress may wish to consider establishing
additional incentives or incentives different from those that federal
programs now have.

   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

The Department of Education provided written comments on a draft of
this report.  The Department said that this report provides important
information on how well state funding is targeted to poor school
districts.  It also suggested several specific changes to improve
accuracy, which GAO made as appropriate.  A copy of these comments
appears in appendix VI.

INTRODUCTION
============================================================ Chapter 1

School districts differ inherently in the amount of local funding
they can raise because they vary in the value of property or other
wealth they are allowed to tax and in the willingness of residents to
tax themselves to support education.  States play the leading role in
equalizing funding among school districts by providing aid that helps
reduce these funding gaps.  The federal government plays a more
limited, indirect role by targeting federal funding to poor students
and by encouraging states through the use of incentives in the
Improving America's Schools Act of 1994 to equalize funding among
their school districts.

   BACKGROUND
---------------------------------------------------------- Chapter 1:1

The federal government's main role in elementary and secondary
education since the 1960s has been to target federal funding toward
services for educationally disadvantaged children through
categorical, program-specific grants.  The largest single federal
elementary and secondary education grant program, which began in
1965, is title I of the Elementary and Secondary Education Act.  This
program continues to serve educationally disadvantaged children
through program-specific grants.  The fiscal year 1997 appropriation
for the disadvantaged was $7.3 billion.

The federal role in funding elementary and secondary education has
traditionally been limited, however, with state and local governments
providing most funding.  The federal government funds only about 7
percent of total national education funding, with states and local
governments funding nearly an equal share of the remaining funding.
Individual states' share of funding, however, varies considerably.
State contributions in the 1991-92 school year ranged from 8 percent
of total (state and local) funding in New Hampshire to 85 percent of
total funding in New Mexico.

The federal government does target funds to disadvantaged and poor
students.  As we reported in our study of targeting to poor
students,\5 although federal dollars make up only a small part of
total national funding of elementary and secondary education, the
effect of adding federal funds to state funds increased the targeting
of funds to poor students by 77 percent in school year 1991-92.
Moreover, 64 percent of poor children attended public schools in 21
states that had significant funding gaps between poor and wealthy
districts, according to our study.\6 To the extent that poor students
live in poor districts, federal funds help to reduce the effect of
tax base disparities among districts.  Although the number of poor
students in a district tends to increase as district wealth declines,
the increase is not great.\7

States' ability to fund education can vary considerably, depending on
states' income levels, the number of children enrolled in public
school, and the number of children requiring additional services,
such as special programs for disabled or poor children.  States with
higher income levels can afford to finance higher levels of education
funding per pupil.  In the 1991-92 school year, states' average
income per weighted pupil ranged from $41,385 in Utah to $160,761 in
New Jersey.  States' numbers of poor students or those with
disabilities that require additional educational needs vary widely.
For example, the rate of student poverty ranged from about 33 percent
in Mississippi to about 6 percent in New Hampshire in 1990.\8

In addition, localities' ability to raise funding for education
varies widely.  Among the nation's almost 16,000 school districts,
most receive local funds for education mainly through property taxes
and, to a lesser extent, through local sales and income taxes.  This
reliance on the local property tax to raise revenue, coupled with
large differences in local tax base wealth, accounts for relatively
large funding gaps between wealthy and poor districts.  Localities
with low tax base wealth usually have low funding per pupil even with
high tax rates; localities with high property values have high
funding per pupil even with low tax rates.

Since the 1970s, these funding disparities have resulted in lawsuits
in more than 40 states challenging the constitutionality of the state
school finance system.  More than half of the state systems have been
challenged in court since 1990; in almost half of these cases, states
have subsequently implemented changes designed to make the finance
system more equitable.

In contrast to the federal commitment to funding services for
educationally disadvantaged children, the federal government has
played only a small part in encouraging states to develop equitable
finance systems.  Federal policy encouraging states to equalize their
finance systems appears in two programs of the Improving America's
Schools Act of 1994, which reauthorized the Elementary and Secondary
Education Act of 1965 (ESEA).  Both programs use performance
indicators focusing only on the size of funding gaps and not on a
state's effort to equalize funding among districts.

The first program, title VIII Impact Aid, allows states that the
Secretary of Education certifies as meeting an equity in education
funding standard to take steps to prevent impact aid payments to
local school districts from undermining state equalization efforts.\9
This provision is intended to prevent impact aid from hindering
states' equalization efforts and duplicative compensation of school
districts affected by federal activity (once by the federal
government through impact aid and a second time by the state's
equalization program).  The effect of the provision is to encourage
states to equalize education funding.  States that do not pass the
equalization test may not consider impact aid payments as local
revenue in determining state funding.

The second program, the title I Education Finance Incentive program,
has not yet been funded but would award additional federal money to
states depending on the degree of fiscal effort\10 and funding equity
achieved.  Supporters of this program suggest that if a state's
spending for education increases and spending disparities among a
state's districts decrease, title I funds can be more effectively
allocated to provide disadvantaged children the additional resources
they need.  As noted earlier, in our report on targeting to poor
students, 64 percent of poor students attended public schools in 21
states with significant funding gaps in school year 1991-92.

--------------------
\5 School Finance:  State and Federal Efforts to Target Poor Students
(GAO/HEHS-98-36, Jan.  28, 1998).

\6 The 21 states were Alabama, California, Connecticut, Illinois,
Indiana, Iowa, Maryland, Massachusetts, Michigan, New Hampshire, New
Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode
Island, Texas, Virginia, West Virginia, and Wisconsin.

\7 Nationally, the simple correlation between district wealth
measured by income per pupil and adjusted for differences in
geographic cost within the state and the number of poor students in a
district was -.24 in school year 1991-92.

\8 School Finance:  Trends in U.S.  Education Spending
(GAO/HEHS-95-235, Sept.  15, 1995).

\9 A Department of Education official reported that the school
finance systems of three states were certified as equitable for
school year 1995-96.  As a result, these states could consider
federal impact aid payments to affected school districts as local
revenue and could reduce the state aid entitlements in these
districts accordingly.  In 1997, $615.5 million was appropriated for
impact aid Basic Support Payments (sec.  8003(b)) and $17.5 million
was appropriated for Federal Property (sec.  8002).  These funds
compensate school districts for either a loss of tax revenues due to
federal property tax exemptions or increased costs due to federal
activity.  These activities would include the additional cost to
educate high concentrations of children of federal employees such as
children of parents that work on or near a military installation.

\10 That is, high state spending relative to the state's ability to
pay.

   OBJECTIVES
---------------------------------------------------------- Chapter 1:2

The objectives of this study were to (1) determine what factors
contribute most to reducing the size of funding gaps\11 between poor
and wealthy school districts, (2) identify states that substantially
changed their school finance systems between school years 1991-92 and
1995-96 and determine the effects of such changes on the funding gaps
between wealthy and poor districts, and (3) determine the kinds of
changes needed for states to more fully address these funding gaps.

--------------------
\11 Policymakers and researchers have also been concerned about the
adequacy of educational resources.  Education funding is termed
adequate if it enables each student to achieve a minimum level of
academic performance.  Not much is known, however, about the level of
funding needed to achieve a certain level of performance.  As a
result, determining an adequate level of funding for a district is
difficult.

   SCOPE AND METHODOLOGY
---------------------------------------------------------- Chapter 1:3

To determine the factors contributing most to reducing funding gaps
nationwide, we conducted state-level comparative analyses of states'
equalization efforts (the state share of funding and how this funding
was targeted to poor school districts), the local tax effort of poor
and wealthy districts, and the size of the income-related funding gap
between poor and wealthy districts in the 1991-92 school year, the
most recent year for which a national data set of districts was
available.  Our analyses included all states except Hawaii.\12
Analyses of state targeting of funds, local tax efforts, and
income-related funding gaps accounted for statewide differences in
student need and geographic costs.

Our national analysis of the factors leading to reduced funding gaps
among districts used district resident income per weighted pupil to
measure district ability to fund education from local resources.  We
did not use property wealth per pupil, the measure states use most
often to determine a district's aid allocation, because we could not
devise a property value per pupil measure from the national
district-level databases available.

To determine the effect of finance reforms on the funding gaps
between poor and wealthy districts, we studied four states that
reported changing their school finance systems between school years
1991-92 and 1995-96:  Oregon, Kansas, Louisiana, and Rhode Island.
We chose these states because of their considerably different
approaches to finance reform.  State officials provided information
on changes in state laws made to implement these reforms.

For each of the four states, we analyzed how changes to state
equalization policies and constraints on local tax effort may have
affected both the relative tax effort of poor and wealthy districts
and the size of funding gaps from school years 1991-92 to 1995-96.
To calculate district wealth, we largely relied on the definition of
a district's tax base provided by state education officials.  For
Oregon, Kansas, and Rhode Island, we calculated district tax base
using property wealth.  For Louisiana, we calculated the tax base
using a combination of district property wealth and sales tax
revenues.  See appendix III for a detailed discussion on property
wealth measures in these states.  In addition, we met with several
state and local officials to gain a better understanding of the
policies that led to changes in equalization effort.  A complete list
of the officials we interviewed appears in appendix V.

To determine the changes in state funding and tax base targeting
policies that would be needed to close the income-related funding
gaps between poor and wealthy districts, we used a mathematical model
that relates state equalization effort and local tax policies to the
size of the funding gaps.\13 Our analysis estimates the amount that a
state's share of total funding or targeting effort would have to
increase to completely eliminate rather than just reduce funding gaps
among districts.  We conducted this analysis under alternative
assumptions--assuming districts maintained school year 1991-92 tax
effort or assuming districts all made the same effort--of how states
could constrain local tax policy if they were willing to do so.
Appendix IV provides details of the mathematical model used for this
analysis.

--------------------
\12 We eliminated Hawaii from the analysis because our source of data
was a database used for a previous report for which we conducted a
district-level analysis.  Hawaii's school system is considered one
district, so no comparisons could be made about state allocations to
different districts.  Similarly, the District of Columbia and five
U.S.  territories (American Samoa, Guam, Northern Marianas, Puerto
Rico, and the Virgin Islands) have one-district systems and were not
included as part of the database.  The previous report using this
database was School Finance:  State Efforts to Reduce Funding Gaps
Between Poor and Wealthy Districts (GAO/HEHS-97-31, Feb.  5, 1997).

\13 This was developed in GAO/HEHS-97-31, Feb.  5, 1997.

   DATA SOURCES
---------------------------------------------------------- Chapter 1:4

This report used two data sources.  For the national state-level
analyses, we used a database we developed for a previous report\14
that was compiled from the Department of Education's Common Core of
Data (CCD) for the 1991-92 school year.  We obtained data for per
capita income and population from the 1990 census because the CCD did
not have this information.

To analyze the change in the funding gap in the four states we
studied, we obtained school years 1991-92 and 1995-96 district data
on state and local funding, tax base wealth, and demographic
information directly from each state's department of education or
state legislative officials.  We conducted our work between November
1996 and May 1998 in accordance with generally accepted government
auditing standards.

--------------------
\14 GAO/HEHS-97-31, Feb.  5, 1997.

EXTRA TAX EFFORT OF POOR DISTRICTS
AND STATE EQUALIZATION EFFORT
REDUCE FUNDING GAPS
============================================================ Chapter 2

Two key factors help reduce states' funding gaps between poor and
wealthy districts:  (1) the extent to which a state's poor districts
make a greater tax effort than its wealthy districts and (2) a
state's effort to reduce funding gaps through its equalization
policies.  Poor districts may make a greater tax effort than wealthy
districts in part because residents choose to do so or because state
and local policies directly or indirectly lead to an extraordinary
tax effort in poor districts.  Many states try to lessen the
disparities between poor and wealthy districts' tax bases through
their equalization policies.  Such policies include reducing the
reliance on local funding by increasing the overall state share of
total funding or targeting state funds to favor poor districts.

Of the two key factors affecting funding gaps, poor districts' extra
tax effort was the more important factor in explaining the size of
these gaps in school year 1991-92.  The most equalized school finance
system would enable districts' per pupil funding to be 100 percent of
the state's average per pupil funding for an equal tax effort in all
districts.  We determined the equalization effort of 49 states in
school year 1991-92.  The average state equalization effort was 62
percent, according to our analysis, suggesting that states could have
more impact on the funding gap if they were to strengthen their
equalization policies.  Poor districts in most states were making a
greater tax effort than wealthy districts.

   POOR DISTRICTS' GREATER TAX
   EFFORT HELPS REDUCE FUNDING
   GAPS IN MOST STATES
---------------------------------------------------------- Chapter 2:1

Funding gaps exist mainly because wealthy districts can raise more
local revenue than poor districts.\15 Poor districts could reduce or
even eliminate the funding gaps, however, if they made an
extraordinarily high tax effort compared with wealthy districts'
efforts.  Differences in poor and wealthy districts' tax efforts
reflect the varying tax choices of district residents and the tax
regulations governing those choices.  In school year 1991-92, the tax
effort of poor districts in most states exceeded that of wealthy
districts and contributed to reducing the funding gap.

--------------------
\15 We measured the funding gap between poor and wealthy districts by
calculating the elasticity of total (state and local) funding per
pupil with respect to district tax base wealth measured as district
resident income per pupil.  An elasticity measures the percentage
change in one variable associated with a 1-percent change in a second
variable.  See "Scope and Methodology" in app.  II for further
explanation of the income elasticity of total funding.  All dollar
amounts have been adjusted for within-state differences in geographic
and student need-related costs.

      TAX POLICY AND LOCAL TAX
      CHOICE DETERMINE THE TAX
      EFFORTS OF POOR AND WEALTHY
      DISTRICTS
-------------------------------------------------------- Chapter 2:1.1

Differences in poor and wealthy districts' tax efforts result from
district residents making tax choices that may be affected by their
local and state tax policies.  In many states, local taxing
authorities, such as school district boards, set local tax policy.
For example, such authorities may decide autonomously or with voter
approval when and how much to raise local property taxes for
education.  When these authorities seek voter approval, district
residents may choose taxes for education by voting for or against
property tax rate increases tied to general levies or specific levies
such as initiatives to improve school technology.

States also make policies affecting local taxes.  Since the 1970s,
states have increased their direct control of districts' tax efforts.
For example, some states mandate a certain tax rate or impose a
minimum or maximum tax rate on districts to ensure that districts
contribute a certain share toward their students' education.  States
concerned about disparities in the funding levels between poor and
wealthy districts may influence these tax efforts by financially
rewarding less wealthy districts that increase their tax effort or,
more rarely, by recapturing some local funding from wealthy districts
whose local tax effort raises too much revenue.\16

--------------------
\16 See ch.  3 for examples of these approaches in some of the states
we studied.

      EXTRA TAX EFFORT OF POOR
      DISTRICTS IS COMMON AND
      HELPS REDUCE FUNDING GAPS
-------------------------------------------------------- Chapter 2:1.2

Our 49-state analysis shows that poor districts in most states made a
greater tax effort than wealthy districts, which contributed to
reducing funding gaps.\17 In the 1991-92 school year, the poorest
districts in 35 states made a greater tax effort than the wealthiest
districts.\18 States whose poorest districts had a greater tax effort
compared with the wealthiest districts' had smaller funding gaps (see
table 2.1).  Alaska, California, and Iowa are examples of such
states.  States whose poor districts' relative tax efforts were less
than wealthier districts, for example, Georgia and Maryland, had much
greater funding gaps.

                         Table 2.1

            Higher Tax Effort by Poor Districts
          Reduced Funding Gaps, School Year 1991-
                             92

                         Size of funding gap\a
              --------------------------------------------
Poor
districts'
tax efforts
compared
with wealthy
districts'\b  Large         Moderate        Small/none
============  ------------  --------------  --------------
Less than     Georgia       Connecticut
wealthy       Maryland      Florida
districts     Massachusett  Idaho
              s             Kentucky
              Michigan
              Missouri
              New York
              North
              Carolina

              Pennsylvania
              Rhode
              Island
              Virginia

Somewhat      Alabama       Arkansas        Delaware
more than     Illinois      Colorado        Kansas
wealthy       Ohio          Indiana         Oklahoma
districts     South Dakota  Louisiana       Texas
                            Maine           Washington
                            Minnesota       West Virginia
                            New Jersey
                            North Dakota
                            South
                            Carolina
                            Tennessee
                            Wisconsin

Much more     Montana       Arizona         Alaska
than wealthy                Nebraska        California
districts                   New Hampshire   Iowa
(at least                   Oregon          Mississippi
50% greater)                Vermont         Nevada
                                            New Mexico
                                            Utah
                                            Wyoming
----------------------------------------------------------
\a Funding gaps are measured by elasticity of total (state and local)
funding per weighted pupil with respect to tax base wealth measured
as district resident income per weighted pupil.  A value of 0
indicates that no relationship exists between total funding and
income--that is, no wealth-
related funding gaps exist.  Large funding gaps have a score of .25
or greater; moderate gaps have a score of greater than .10 but less
than .25; and small (or no) gaps have a score of less than or equal
to .10.  The analysis was adjusted to account for within-state
differences in geographic and student need-related costs.

\b These categories are based on a ratio of the tax effort of a
state's poorest districts to the tax effort of its wealthiest
districts.  Local tax effort is the local funding per weighted pupil
raised for $1,000 of income per weighted pupil.

--------------------
\17 The simple correlation between state funding gaps nationwide in
the 1991-92 school year and their relative local tax efforts was
-0.68, indicating that poor districts' greater tax effort was
associated with reduced funding gaps.

\18 We ranked all of a state's districts according to increasing
district income and then divided these districts into five groups.  A
state's poorest districts are in the first group and its wealthiest
districts are in the fifth group.  Each group had about the same
number of students.  However, in some states, the groups may have
differed greatly in their numbers of students because districts could
not be divided into smaller units.  A group's tax effort is defined
as the amount of local revenue raised for $1,000 of income for all
districts in the group.  Funding data were adjusted to reflect
within-state differences in geographic and student need-related
costs.  For further information on relative local tax effort, see
School Finance:  State Efforts to Reduce Funding Gaps Between Poor
and Wealthy Districts (GAO/HEHS-97-31, Feb.  5, 1997), pp.  53-8.

   STATE EQUALIZATION EFFORT
   REDUCES FUNDING GAPS
---------------------------------------------------------- Chapter 2:2

To offset the disparities in district funding levels, many states use
equalization policies aimed at reducing funding gaps.  Equalization
policies have two parts:  the state share of total funding and the
state effort to target poor districts.  Of these two, state share has
a larger impact on state equalization policies.  In effect,
equalization policies determine the extent to which a state enables
its districts to provide the state average funding level when all
districts make an equal tax effort.  Specifically, a state's
equalization effort measures the portion of the state's average
funding per pupil that state aid would enable all districts to
finance with an equal tax effort.\19 States can apply an infinite
combination of state shares and targeting policies to achieve a
certain level of equalization effort.  Although the average state
equalization effort was only 62 percent of the maximum possible
effort in school year 1991-92, state equalization efforts overall
still helped reduce the funding gaps.

--------------------
\19 For every state school finance system, a point exists where if
all districts made the same tax effort, they would have the same
total funding per pupil.  The closer this funding level is to the
state's average per pupil funding, the greater the state's
equalization effort.  The most equalized school finance system would
enable districts' per pupil funding to be 100 percent of the average
total (state and local) per pupil funding for an equal tax effort.
See app.  II for a more complete discussion of measuring states'
equalization efforts.

      STATE SHARE AND STATE
      TARGETING EFFORT DETERMINE
      EQUALIZATION EFFORT
-------------------------------------------------------- Chapter 2:2.1

The state share of total funding and the state targeting effort
determine a state's equalization effort.  Increasing the state share
of total funding reduces the relative amount of the state's total
education funding that depends on district wealth.\20

Holding state share steady but targeting more state funds to poor
districts than to wealthy districts offsets the relative disparities
in districts' ability to raise revenues.\21

State targeting efforts imply that some wealthy districts may receive
no state aid or may remit a certain share of their locally raised
revenues to the state, a transaction termed the "recapture" of funds.

As seen in table 2.2, state share has an impact on equalization
efforts.  According to our analysis, a relatively high state share
always produced an above average equalization effort.  Even when a
state's targeting effort was low, high state shares still resulted in
an above average equalization effort.

In contrast, states with low state funding shares generally had
targeting policies that substantially favored poor districts.  For
example, only two of the eight states with low state shares also had
low targeting efforts (Oregon and South Dakota).\22 None of the eight
states had a targeting effort large enough to produce an above
average state equalization effort.

                         Table 2.2

           High State Shares More Important Than
           Targeting Effort to State Equalization
                Efforts, School Year 1991-92

                               State Share\a
                  ----------------------------------------
                                              High
Targeting         Low (less     Medium (35%   (greater
effort\b          than 35%)     to 60%)       than 60%)
----------------  ------------  ------------  ------------
High (greater     New           Colorado
than 55%)         Hampshire     Florida
                                Maryland
                                Nevada
                                New York
                                Rhode Island

Medium (15% to    Illinois      Arizona       Arkansas
55%)              Massachusett  Connecticut   Kentucky
                  s             Georgia
                  Michigan      Kansas
                  Nebraska      Maine
                  Vermont       Minnesota
                                Ohio
                                Pennsylvania
                                South
                                Carolina
                                Texas
                                Utah
                                Virginia
                                Wisconsin

Low (less than    Oregon        Indiana       Alabama
15%)              South Dakota  Iowa          Alaska
                                Missouri      California
                                Montana       Delaware
                                New Jersey    Idaho
                                North         Louisiana
                                Dakota        Mississippi
                                Tennessee     New Mexico
                                Wyoming       North
                                              Carolina
                                              Oklahoma
                                              Washington
                                              West
                                              Virginia
----------------------------------------------------------
Note:  States in bold have equalization efforts above the national
average (62 percent).

\a State share is the state share of total (state and local) funding.

\b State targeting is measured by the income elasticity of state
funding, where district income represents the tax base per pupil.
The income elasticity is the percentage difference in state funding
resulting from a 1-percent change in district income.  Because both
independent and dependent variables are measured relative to their
respective state averages, they represent percentage differences from
the state averages.  In this report, we multiplied the elasticity by
100 to measure the change in state funding from the state average
funding level associated with a 100-percent change in tax base wealth
from the state average tax base wealth.  Thus, a targeting effort of
40 percent means that as district income increased by 100 percent,
state funding decreased by 40 percent, where the changes in funding
and income are measured relative to their state average.

--------------------
\20 Increasing the state share of total state and local funding may
involve increasing state education spending.  Many states raise
revenue through a combination of sales and income taxes.  However,
revenues from these sources can be more sensitive to cyclical
fluctuations of the state economy than property taxes, which are the
main source of funding for most U.S.  school districts.

\21 State targeting is measured by the income elasticity of state
funding, where district income represents the tax base per pupil.
The income elasticity is the percentage of difference in state
funding resulting from a 1-percent change in district income.  In
this report, we multiplied the elasticity by 100 to measure the
change in state funding associated with a 100-percent change in tax
base wealth.  See app.  II for further explanation of this
elasticity.  All dollar amounts have been adjusted for within-state
differences in geographic and student need-related costs.

\22 As shown in ch.  3, Oregon has substantially increased its
equalization effort since the 1991-92 school year.

      VARYING COMBINATIONS OF
      STATE SHARE AND TARGETING
      EFFORT CAN ACHIEVE THE SAME
      EQUALIZATION EFFORT
-------------------------------------------------------- Chapter 2:2.2

Although state share has more impact on closing funding gaps than
targeting effort, states have some flexibility in applying these two
means to achieve a certain equalization effort.  According to our
analysis, states could have achieved the same equalization effort in
school year 1991-92 with different combinations of state share and
targeting.  Table 2.3 shows four states that achieved an equalization
effort of 76 percent and four others that achieved an effort of 54
percent, each with different combinations of state funding shares and
targeting efforts.  For example, Colorado and Alaska both achieved an
equalization effort of 76 percent--
Colorado with a high targeting effort and a relatively low state
share of total funding and Alaska with a high state share and no
targeting effort.  In general, the greater a state's share of total
funding, the less a state has to target to poor districts to reach a
certain equalization effort.  Likewise, the greater a state's
targeting effort, the less its share of total education funding needs
to be.  (See table IV.5 in app.  IV for the range of combinations.)

                         Table 2.3

           Different Combinations of State Share
           and Targeting Effort Produced the Same
           Equalization Effort, School Year 1991-
                             92

                        State share of
                     total funding (in  Targeting effort\b
State                         percent)        (in percent)
------------------  ------------------  ------------------
76% equalization effort\a
----------------------------------------------------------
Alaska                              76                   0
Washington                          75                   1
Idaho                               67                  13
Colorado                            44                  75

54% equalization effort\a
----------------------------------------------------------
Iowa                                49                  10
Kansas                              44                  24
Pennsylvania                        43                  26
Virginia                            36                  50
----------------------------------------------------------
\a Equalization effort is a function of state share and state
targeting effort.  See app.  II for details.

\b State targeting is measured by the income elasticity of state
funding, where district income represents the tax base per pupil.
The income elasticity is the percentage difference in state funding
resulting from a 1-percent change in district income.  In this
report, we multiplied the elasticity by 100 to measure the change in
state funding associated with a 100-percent change in tax base
wealth.  Thus, a targeting effort of 40 percent means that as
district income increased by 100 percent, state funding decreased by
40 percent, where the changes in funding and income are measured
relative to their state average.

      STATE EQUALIZATION EFFORTS
      CONTRIBUTED TO REDUCING
      FUNDING GAPS
-------------------------------------------------------- Chapter 2:2.3

Although states could achieve a 100-percent equalization effort with
sufficient state funding share and targeting efforts, only Nevada
made the maximum effort given the total funding available in the
state in school year 1991-92.\23 The average state equalization
effort in school year 1991-92 would enable districts to finance 62
percent of the average funding level assuming all districts were
making an equal tax effort.  Other states' equalization efforts in
school year 1991-92 ranged from 87 percent (Arkansas and Kentucky) to
about 13 percent (New Hampshire).

States making a greater effort in school year 1991-92 had smaller
funding gaps.\24

Table 2.4 shows the size of state funding gaps relative to states'
equalization efforts for 21 states that had about the same relative
local tax effort.  In general, the larger the equalization effort in
these states in school year 1991-92, the smaller the funding gaps
between poor and wealthy districts.  For example, West Virginia had a
large equalization effort, resulting in a small funding gap between
its wealthy and poor districts.  More specifically, the poorest
districts in West Virginia had $4,859 per weighted pupil; the
wealthiest had $5,044, a difference of only 4 percent.  In contrast,
Illinois had a small equalization effort, which was associated with a
large funding gap.  The poorest districts in Illinois had $4,330 per
weighted pupil; the wealthiest had $7,249, a difference of 67
percent.

                               Table 2.4

                   Large Equalization Effort Reduced
                   Funding Gaps, School Year 1991-92

                                 Size of funding gap\a
                  ----------------------------------------------------
State
equalization
effort\b          Large             Moderate          Small/none
================  ----------------  ----------------  ----------------
Small             Illinois          New Jersey
(30% to 49%)      Ohio              North Dakota
                  South Dakota      Tennessee

Moderate                            Indiana           Kansas
(50% to 69%)                        Louisiana
                                    Maine
                                    Wisconsin

Large             Alabama           Arkansas          Delaware
(70% to 87%)                        Colorado          Oklahoma
                                    Minnesota         Texas
                                    South Carolina    Washington
                                                      West Virginia
----------------------------------------------------------------------
Note:  The poor districts' tax efforts in these 21 states were all
somewhat larger than wealthy districts', with the ratio of poor
districts' tax efforts to wealthy districts' ranging from 1.04 to
less than 1.5.

\a Funding gaps are measured by the elasticity of total (state and
local) funding per weighted pupil with respect to district tax base
(income) per weighted pupil and are adjusted for within-state
differences in geographic and student need-related costs.  An
elasticity of 0 means that no relationship exists between district
income and total funding per pupil--that is, no income-related
funding gaps exist.  Large funding gaps have an income elasticity of
.25 or greater; moderate gaps have an income elasticity greater than
.10 but less than .25; and small (or no) gaps have an income
elasticity of less than or equal to .10.

\b A state equalization effort is the proportion of the state average
funding per pupil that state aid would enable districts to finance if
all districts were to make the same tax effort.  An equalization
effort equal to 100 percent means that all districts would be able to
finance the states' average funding level for their pupils with an
equal minimum tax effort; less than 100 percent means the state
policies would enable districts to finance a funding level less than
the state's average if all districts were to make the same tax
effort.

--------------------
\23 In fact, Nevada targeted more state funds to poor districts than
was necessary to allow districts to spend the state average funding
per weighted pupil with an average tax effort.  As a result, poor
districts in Nevada could finance the state average funding level
with lower tax effort than wealthy districts.

\24 The simple correlation between states' funding gaps and state
equalization efforts nationwide was -0.52, meaning that greater
equalization efforts were linked to smaller funding gaps.

   POOR DISTRICTS' EXTRA EFFORT
   MORE IMPORTANT THAN
   EQUALIZATION EFFORT IN CLOSING
   FUNDING GAPS IN 1991-92
---------------------------------------------------------- Chapter 2:3

Although state equalization effort has an important effect on
reducing the funding gap between poor and wealthy districts,
districts' relative tax effort was more important in closing the
funding gaps in 1991-92.\25

Nationwide, equalization effort and relative local tax effort
accounted for about 63 percent of the variation in the funding gap.
In 35 states, poor districts made a greater tax effort than wealthy
districts.  Nine states in school year 1991-92 with funding gap
scores that were not statistically different from zero exemplify the
importance of this tax effort (see table 2.5).  In these states, the
tax effort of the poorest districts was greater than that of the
wealthiest districts.  Poor districts' extra effort ranged from 106
percent as much as wealthy districts' in Delaware to over four times
as much in Wyoming.  Poor districts' extra effort was particularly
important in the three states--Iowa, Kansas, and Wyoming--that closed
their funding gaps with an equalization effort that was less than the
national average (62 percent).

                         Table 2.5

              Poor Districts' Extra Tax Effort
             Important to Closing Funding Gaps,
                    School Year 1991-92

                           State
States with no      equalization    Poorest districts' tax
significant             effort\b    effort as a percent of
funding gaps\a         (percent)     wealthiest districts'
------------------  ------------  ------------------------
Wyoming                       53                       417
Iowa                          54                       189
Kansas                        54                       124
Mississippi                   65                       284
Utah                          71                       170
Texas                         72                       119
Delaware                      75                       106
West Virginia                 82                       117
New Mexico                    85                       284
----------------------------------------------------------
Note:  States in bold have equalization efforts above the national
average (62 percent).

\a Funding gaps are measured by the elasticity of total (state and
local) funding per weighted pupil with respect to district tax base
(income) per weighted pupil and are adjusted for within-state
differences in student need-related and geographic costs.

\b A state equalization effort is the proportion of the state average
funding per pupil that state aid would enable districts to finance if
all districts were to make the same tax effort.  Local tax effort is
the local funding per weighted pupil raised for $1,000 of income per
weighted pupil.

--------------------
\25 We used a statistical measure to assess the relative importance
of these two factors in contributing to these results.  The measure
is the beta coefficient associated with the regression coefficient
for each variable.  The beta coefficient measures the importance of
an independent variable relative to the other independent variables
in explaining the variation in the dependent variable.  The beta
coefficient associated with relative local tax effort was greater
than the one for equalization effort by 42.4 percent.  See
GAO/HEHS-97-31, Feb.  5, 1997, pp.  96-7.

   CONCLUSION
---------------------------------------------------------- Chapter 2:4

On the basis of 1991-92 data, poor districts' extra tax efforts had
more impact on closing funding gaps between poor and wealthy
districts than state equalization efforts.  The average state
equalization effort in school year 1991-92 was 62 percent, however,
suggesting that states could have more impact on the funding gap if
they were to strengthen their equalization policies.  Among the nine
states with no significant funding gap, the poor districts' greater
tax effort substantially contributed to closing this gap in at least
three of these states.  This suggests that in developing strategies
to further reduce funding gaps, policymakers may want to consider
policies regulating local tax effort in combination with equalization
policies.

TAX CONSTRAINTS PLAY AN IMPORTANT
ROLE IN REDUCING FUNDING GAPS
AMONG SCHOOL DISTRICTS
============================================================ Chapter 3

Steps taken to equalize funding among poor and wealthy school
districts in the four states we reviewed--Oregon, Kansas, Rhode
Island, and Louisiana--produced mixed results.  According to state
officials, each state made changes designed to increase the amount of
state aid to poor districts to close the funding gap between poor and
wealthy districts.  However, only two of the states--Oregon and
Kansas--narrowed the funding gap mainly because they significantly
increased their equalization effort and constrained local tax effort.
Louisiana's funding gap widened, and Rhode Island's funding gap
stayed almost the same because increased equalization efforts were
comparatively small and more than offset by changes in the respective
school districts' tax efforts.  These states' experiences, however,
illustrate how both state equalization efforts and policies affecting
the tax efforts of poor and wealthy districts can play an important
role in reducing the funding gap.

   DIFFERING FORCES SHAPED CHANGES
   TO STATE SCHOOL FINANCE SYSTEMS
---------------------------------------------------------- Chapter 3:1

We chose Oregon, Kansas, Rhode Island, and Louisiana to study because
they used a wide array of strategies for changing their finance
systems, these changes took place between school years 1991-92 and
1995-96, and state officials thought the changes would improve
student equity.\26 Beyond improving student equity, the forces
driving reform in each state varied and included citizens' demands
for property tax relief, state budgetary crises, and court pressure.

--------------------
\26 Although student equity can have different meanings, in this
report it refers to equal opportunity.  Equal opportunity, which is
also known as fiscal neutrality, means that differences in
expenditures per pupil cannot be related to local school district
wealth.  Within this definition, we also recognize that differences
among students mean some students deserve or need more educational
services than others.

      OREGON:  PROPERTY TAX RELIEF
-------------------------------------------------------- Chapter 3:1.1

Throughout the 1980s, two recurring problems affected Oregon's school
finances:  (1) a crisis in some districts' ability to fund schools
because voters repeatedly rejected operations levies and (2) frequent
attempts by antitax activists to reduce property taxes, the main
source of local funding for the state's public schools.  To address
the school funding crisis, the Oregon state legislature suspended the
state funding formula in 1989, and the state began allocating future
funding (through school year 1991-92) at the 1989 level plus an
increasing percentage factor, according to a state official.\27

Oregon took these actions after a blue ribbon panel commissioned by
the legislature recommended that the state scrap the existing finance
system and create one less reliant on local property taxes.  In 1990,
however, before the legislature could develop a new funding formula,
Oregon voters adopted a constitutional amendment placing a ceiling on
the property tax rate that could be assessed for school operations
and requiring the state to replace any lost local education revenues
with state funds.  This forced the legislature to develop a school
finance formula driven mainly by state funds.  The new tax rates were
phased in between school years 1991-92 and 1995-96; steps to
implement the new funding formula began in school year 1992-93 and,
according to a state official, are scheduled to be completed by 2001.

--------------------
\27 For 3 years ending in school year 1991-92, Oregon's school
funding was in transition from the previous distribution formula
suspended in 1989.  According to a state official, during each of
those 3 years, districts received their 1989 state grant plus an
increasing percentage factor.

      KANSAS:  COURT PRESSURES AND
      PROPERTY TAX RATE
      DISPARITIES
-------------------------------------------------------- Chapter 3:1.2

An October 1991 pretrial court ruling was the main reason for changes
to Kansas' school finance system.  The legal challenge from four
consolidated lawsuits filed by school districts and citizens claimed,
among other things, that large disparities in both local property tax
rates and in spending per pupil violated the state constitution.  The
district court judge met with state government and education leaders
and presented his interpretation of the state's responsibility for
educating all of its children.  He emphasized that the state has a
duty to develop a rational finance system that recognizes disparities
in spending based on legitimate student and district characteristics.
He suggested that the pending trial could be avoided if the finance
system was changed in the 1992 legislative session.  The legislature
accepted the judge's challenge and developed a new finance system
that was implemented in school year 1992-93.

      RHODE ISLAND:  STATE BUDGET
      CRISIS
-------------------------------------------------------- Chapter 3:1.3

In 1990, a crisis in Rhode Island's savings and loan institutions and
credit unions forced the state to use state funds to bail out these
entities, state education officials said.  According to these
officials, diverting state funds to address this crisis forced the
legislature to cut the state budget, including funding to elementary
and secondary education.  These cuts dramatically reduced the state
share of education funding from 52 percent in 1991 to about 38
percent in 1992.  The cuts in state funding hit hardest in poorer
districts that could not offset the lost state funding with increased
local revenue, resulting in a reduction in district revenue,
according to the officials.  In contrast, they said, wealthier
districts could protect their spending levels because they could
fully offset losses in state funding by increasing local revenue.
Recognizing the growing inequities, the legislature began
implementing changes to the finance system in 1992.

      LOUISIANA:  STATE BUDGET
      CRISIS
-------------------------------------------------------- Chapter 3:1.4

A crisis in the oil industry in the 1980s, which dramatically reduced
state tax revenue, forced the Louisiana state legislature to reduce
the state share of funding for its public schools, state education
officials said.  The impact of the cuts on state funding highlighted
the inequities in the state funding formula, which allocated state
funds on the basis of teacher and staff costs and made little or no
adjustment for differences in districts' abilities to raise revenue
or for student need, they said.  In response, Louisiana voters passed
a constitutional amendment mandating the equitable allocation of
education funds and transferring control of the state funding formula
from the state legislature to the state Board of Elementary and
Secondary Education (BESE).  In 1988, BESE began revising the funding
formula to improve student equity.  The legislature approved the new
funding formula in 1992, and the state began implementing it in the
1992-93 school year; it is scheduled to be completed by the 1999-2000
school year.

   CHANGES TO STATE POLICIES
   AFFECTING FUNDING GAPS
---------------------------------------------------------- Chapter 3:2

In revising their school finance systems, all four states increased
their equalization effort and made changes affecting the local tax
effort of their school districts.\28 As table 3.1 shows, Oregon and
Kansas each substantially increased their equalization effort; Rhode
Island and Louisiana more modestly increased their effort.  The large
increases in Oregon's and Kansas' equalization efforts can be
explained by the large increases in their state shares of total
funding and, in Kansas, by an increase in its targeting of state
funds to poorer districts.  The increase in Rhode Island's
equalization effort reflects the relatively small increase in the
state share of education funding.  The increase in Louisiana was due
to the state's effort to target more state funds to poor school
districts.

                                        Table 3.1

                            Changes in State School Financing
                         Measures and Actions Affecting Local Tax
                         Effort, School Years 1991-92 to 1995-96

                            (Changes are in percentage points)

Changes in state
measure or
action            Oregon            Kansas            Rhode Island       Louisiana
----------------  ----------------  ----------------  -----------------  ----------------
Equalization      +.26\             +.32              +.01               +.05
effort\a

State share\b     +.26              +.17              +.02               -.04

Tax base          -.07              +.24              -.02               +.15
targeting\c

Actions           Mandated maximum  Mandated uniform  Ended incentives   Introduced
affecting local   property tax      property tax      for increasing     incentives to
tax effort        rate to raise     rate to raise     local education    increase local
                  most local        most local        expenditures and   property or
                  revenue           revenue           local property     sales tax effort
                                                      taxes
-----------------------------------------------------------------------------------------
\a Equalization effort represents the combined effects of the state
share of total education funding and the targeting of funds to poorer
school districts.

\b State share is the proportion of total funding (state and local)
provided by the state.

\c This is the state's effort to target more funds to poor districts.

Regarding changes affecting the local tax effort, Oregon and Kansas
constrained districts' tax efforts.\29 In addition, Rhode Island and
Louisiana made changes that affected incentives for increasing
districts' tax efforts.\30 Rhode Island suspended the funding program
that had encouraged districts to increase their education spending.
In contrast, Louisiana introduced a state aid matching program for
districts willing to exceed a minimum tax rate.  Table 3.1 shows each
state's relative change in state school finance measures as well as
actions affecting local tax efforts.  The actual values for each
state's equalization effort, state targeting effort, state share,
relative local tax effort, and funding gaps for school years 1991-92
and 1995-96 appear in appendix III.

--------------------
\28 "Tax effort" refers to a school district's effort to raise local
funding for all primary and secondary education services relative to
a measure of a district's ability to pay.  Tax rates, on the other
hand, are factors applied against a specific statutory tax base to
determine a district's tax yield.  Tax rates directly affect a school
district's tax effort.  For a further discussion of tax effort, see
app.  III.

\29 State law set the statutory local tax rates, which in turn
affected the amount of local revenue that a district could raise for
education purposes relative to its tax base wealth.  This effectively
constrained local tax effort.

\30 The school districts in Rhode Island are fiscally dependent.
Local funding for elementary and secondary education is raised as
part of the local municipal tax levy.

   STATE EFFORTS PRODUCED MIXED
   RESULTS
---------------------------------------------------------- Chapter 3:3

State legislatures often change their school finance systems to
improve student equity.  In most cases, some wealthier districts must
give up some of their advantage to improve the funding levels of
poorer districts.  Even so, a state may not reach an acceptable level
of student equity if changes in local tax choices offset the state's
equalization efforts.  Two states, Oregon and Kansas, narrowed the
funding gap mainly by increasing the state share of education funding
and limiting districts' ability to raise local revenue.  In Rhode
Island and Louisiana, changes in school district tax efforts
undermined the effects of moderate state equalization efforts.
Figure 3.1 summarizes the changes in the size of the funding gaps
between wealthy and poor districts in the four states we reviewed.

   Figure 3.1:  Change in Funding
   Gap, School Years 1991-92 and
   1995-96

   (See figure in printed
   edition.)

Note:  The funding gap between poor and wealthy districts is defined
as the elasticity of a district's total (state and local) funding
relative to district tax base.  An elasticity of 0 implies that no
funding gap exists (fiscal neutrality has been achieved) because no
systematic differences exist in per pupil funding between wealthy and
poor districts.  A positive elasticity implies that total funding per
weighted pupil is higher in wealthy districts than in poor districts.
The tax base used to analyze the changes in the states was property
wealth for Oregon, Kansas, and Rhode Island, and a combination of
sales tax and property wealth for Louisiana.

      OREGON REDUCED FUNDING GAPS
-------------------------------------------------------- Chapter 3:3.1

In 1990, Oregon's voters approved an initiative that set a statewide
maximum levy rate.\31 This rate significantly reduced local tax
effort and forced the legislature, which was creating a new funding
formula, to adopt a formula funded largely by state revenue rather
than local revenue.  Before implementing the new formula, the
education funding for Oregon's school districts was primarily based
on districts' property wealth and voters' willingness to approve
funding levies, resulting in a large variation in spending levels by
district.  To make up for the loss of local revenue, the state
sharply increased its share of funding from 33 to 59 percent between
school years 1991-92 and 1995-96.  The new state funding formula
included a new base funding level per student and allowed for
adjustments to the base to account for (1) student needs, such as
those for special education, poverty, and English as a second
language, and (2) district needs, such as transportation costs and
teacher costs based on teacher experience.  The state share of
funding for an individual district equaled the base funding level
adjusted for student and district needs less the revenue the district
could raise locally at the mandatory tax rate.

Initially, under the new state finance system, total revenue in the
wealthiest districts would have decreased significantly; revenue in
the poorest districts would have greatly increased.  Concerned about
the impact of these funding changes, the legislature decided to phase
in the new formula, limiting the effect of the change on wealthy
districts, while slowly increasing funding to the poorest districts.

Despite the phased-in approach, the changes in Oregon's finance
system narrowed the funding gap between the wealthiest and poorest
districts from 0.23 to 0.15 as shown in figure 3.1.  For the poorest
districts, total funding increased by $805 per weighted pupil; for
the wealthiest districts, it increased by $586 (see table 3.2).

                         Table 3.2

           Changes in Oregon's Education Funding,
              School Years 1991-92 to 1995-96

              Poorest districts      Wealthiest districts
            ----------------------  ----------------------
Funding      1991-   1995-  Change   1991-   1995-  Change
category        92      96      \a      92      96      \a
----------  ------  ------  ------  ------  ------  ------
Total\b     $4,723  $5,528    $805  $5,762  $6,347  $586\c
State\b      2,288   3,782   1,494   1,357   3,074   1,717
Local\b      2,434   1,746    -688   4,405   3,273       -
                                                     1,132
Local tax    17.58    8.76   -8.82   11.43    5.94   -5.49
 effort\d
----------------------------------------------------------
\a Dollar difference (1995-96 dollars less 1991-92 dollars).

\b Funding figures are in terms of per weighted pupil.  Dollar
amounts have not been adjusted for inflation.

\c Difference is due to rounding.

\d Local tax effort for each group--poorest districts and wealthiest
districts--is the total amount of local revenue raised by all
districts within the group for every $1,000 of district property
wealth.  We divided each state's student population by quintiles
according to district tax base wealth.  The poorest and wealthiest
districts in this table have from 16 to 22 percent of the state's
students each.

Oregon succeeded in reducing its funding gap because it increased its
equalization effort by increasing its state share of education
funding more than enough to offset the modest decline in its effort
to target more funds to poorer districts.  The voter-driven
initiative had the effect of reducing the tax efforts of both poor
and wealthy districts proportionately.  Thus, almost no change
occurred in the relative tax effort of both poor and wealthy
districts, ensuring that the state's increased equalization effort
would reduce the funding gap.

Under the new finance system, although all Oregon districts received
more state aid, a smaller share of the increased state aid was
targeted to poor districts.  The state decided to constrain the
implementation of its new funding formula by gradually increasing
state aid to its poorest districts to avoid reductions in total
funding in wealthier districts.  Between school years 1991-92 and
1995-96, about 66 percent of the $1,717 increase in state funding per
weighted pupil was needed to replace the wealthiest districts' loss
of $1,132 per weighted pupil in local funding.  In the poorest
districts, most of the increased state aid was new funding rather
than a replacement for lost local funding.  Only 46 percent of the
$1,494 increase in state funding per weighted pupil was needed to
cover the $688 loss in local funding.

--------------------
\31 This levy limitation only affected the revenue raised for
operations expenditures.  Between 1991-92 and 1995-96, the maximum
levy rate was reduced from $15 per $1,000 of property value to $5.
Revenue for construction and capital improvements is primarily
provided by the local district.  To be consistent, our analyses for
the four states included the revenue raised for both operations and
capital expenditures.

      KANSAS REDUCED FUNDING GAPS
-------------------------------------------------------- Chapter 3:3.2

In 1992, the Kansas legislature, hoping to avoid a trial of the
constitutionality of the state finance system, made changes that
increased the state's role in determining school districts' funding
levels.  To address both student and taxpayer equity concerns, the
state increased its share of funding from 42 to 59 percent (between
school years 1991-92 and 1995-96), targeted more funding to poor
districts, and imposed a uniform tax rate on all districts, giving
most districts property tax relief, while raising tax rates for some
of the wealthiest districts.\32 In the process, the state
dramatically revised its school finance system.

Beginning in the 1992-93 school year, the state (1) set a base budget
for each district based on student and district needs such as
vocational and bilingual education and enrollment size; (2) funded
the difference between a district's base budget amount and what the
district could raise locally under the uniform statewide property tax
rate; (3) required districts that raised revenues above the base
budget, at the uniform tax rate, to remit the excess revenue to the
state for distribution as state aid to less wealthy districts;\33 and
(4) provided districts the option of raising additional funds--up to
25 percent above the base budget--with an increase in the property
tax rate subject to voter approval.\34 The state provided
supplemental funding for some districts that raised the additional
revenue--the poorer the district the higher the state funding.  This
funding was intended to give high-spending districts the opportunity
to maintain their spending levels.  Districts are not eligible for
supplemental state funding if their assessed valuation per pupil is
at or above the 75th percentile of assessed valuations for all
districts in the state.

Overall, the changes in Kansas' finance system narrowed the funding
gap between the wealthiest and poorest districts from 0.10 to 0.08,
as shown in figure 3.1.  For the poorest districts, total funding
increased $1,124 per pupil; for the wealthiest districts, it
increased $1,111 (see table 3.3).\35

                               Table 3.3

                 Changes in Kansas' Education Funding,
                    School Years 1991-92 to 1995-96

                          Poorest districts      Wealthiest districts
                        ----------------------  ----------------------
                         1991-   1995-  Change   1991-   1995-  Change
Funding category            92      96      \a      92      96      \a
----------------------  ------  ------  ------  ------  ------  ------
Total\b                 $4,026  $5,150  $1,124  $5,840  $6,951  $1,111
State\b                  2,471   3,783   1,312   1,892   2,489     597
Local\b                  1,555   1,367    -188   3,948   4,462     514
Local tax effort\c       99.37   78.96       -   54.95   59.40    4.45
                                         20.41
----------------------------------------------------------------------
\a Dollar difference (1995-96 dollars less 1991-92 dollars).

\b Funding figures are in terms of per weighted pupil.  Dollar
amounts have not been adjusted for inflation.

\c Local tax effort for each group--poorest districts and wealthiest
districts--is the amount of total local revenue raised by all
districts within the group for every $1,000 of district wealth.  Each
group has approximately 20 percent of the state's student population.

Kansas succeeded in reducing its funding gap because it increased its
equalization effort by significantly increasing both the state share
of funding and its effort to target more funding to poor districts.
The state also imposed a uniform tax rate on all districts that had
the effect of decreasing the poorest districts' tax effort and
increasing that of the wealthiest.  Although this change in tax
effort would normally widen the funding gap between poor and wealthy
districts, this was prevented in part because the wealthy districts
were required to remit their excess local revenue for distribution as
state aid to less wealthy districts.  In addition, even though the
state gave districts the choice of raising their property tax rates
enough to increase their spending levels up to 25 percent above the
base budget, limiting this additional spending allowed the state to
maintain control over district spending levels.  More than half of
the 304 districts chose to increase their spending levels above the
base budget in school year 1995-96.

All these changes led to nearly every district receiving additional
state funding.  As table 3.3 shows, between school years 1991-92 and
1995-96, the poorest districts received proportionately more state
aid than the wealthiest districts.  The poorest received an
additional $1,312 per weighted pupil in state aid under the new
system, an increase of about 53 percent.  In contrast, the wealthiest
districts received an additional $597 per weighted pupil in state
aid, an increase of only about 32 percent.  The wealthiest group
included 10 districts that received no state aid in school year
1995-96 and instead had to remit about $34 million in excess local
revenue to the state.  Had these 10 districts kept the excess
revenue, the funding gap between wealthy and poor districts would
have widened, not narrowed, according to our analysis.

The state's imposing the uniform property tax rate, in addition to
improving student equity, more equally distributed tax burdens by
district.  As table 3.3 shows, the tax effort of the poorest
districts dropped by $20.41 per pupil (a 21-percent decrease); the
tax effort of the wealthiest districts increased by $4.45 per pupil
(an 8-percent increase).  Nevertheless, the poorest districts still
had a higher tax effort than the wealthiest.  This indicates that
even with more state aid and a reduced tax effort, Kansas' poorest
districts were still making a greater tax effort than the wealthiest
districts.

--------------------
\32 Kansas' statewide uniform property tax rate was initially set at
$32 per $1,000 assessed property valuation in 1992 and only applied
to the local revenue raised to finance a district's base budget
amount.  The Kansas legislature increased this rate to $33 in 1993
and $35 in 1994; it later lowered it to $33 in 1997.

\33 Of Kansas' 304 districts, 10 remitted excess local revenue
totaling $34.3 million to the state in the 1995-96 school year.

\34 This provision, known as the local option budget (LOB), has been
subject to a protest petition and election provision since school
year 1993-94.  When the school district board adopts a resolution for
an LOB, the resolution may be adopted unless a protest petition
signed by at least 5 percent of the district's electorate is filed
within 30 days after publication.  If the petition is filed, the LOB
cannot be used unless approved by the electorate.

\35 In school year 1991-92, the difference in total funding between
the poorest and wealthiest districts was large--about $1,800 per
pupil.  By school year 1995-96, that difference remained about the
same.  In contrast, our measure of the tax base elasticity of total
funding among all school districts in Kansas, which measures the gap
in funding between poor and wealthy districts, shows somewhat small
gaps of 0.10 in 1991-92 and 0.08 in school year 1995-96.  However, in
calculating the degree of change in both measures between school
years 1991-92 and 1995-96, we found that the difference narrowed by
about the same margin of 20 percent.

      RHODE ISLAND'S FUNDING GAPS
      CHANGED LITTLE
-------------------------------------------------------- Chapter 3:3.3

Before 1995, Rhode Island's operations aid program allocated a given
percentage of a district's total expenditures to each school
district.  To help equalize total funding, poorer districts received
a higher state funding percentage than wealthier districts, although
all districts were guaranteed some percentage of their total
expenditures until 1994.  This provided a greater incentive for poor
districts to increase their funding compared with wealthier
districts.\36 With the sharp drop in state education funding in
school year 1991-92, however, the state reduced the amount of
district expenditures it financed.  This decline in state aid forced
the districts to try to replace the lost funds with local revenue
raised from property taxes.  Although the wealthier districts could
generally replace the lost state aid, some of the poorer districts
met taxpayer resistance, according to state officials.  Recognizing
that the funding gap between the poor and wealthy districts was
growing, the legislature took steps to address the system's
inequities.  The state (1) stopped using its equalization formula to
distribute funding in school year 1995-96, and, as a result, poor and
wealthy districts alike no longer had an incentive to increase their
education expenditures\37 and in turn their local tax effort; (2)
implemented several new categorical funding programs targeted
specifically to poor communities; and (3) slightly increased the
state share of funding from 40 percent in school year 1991-92 to 42
percent in school year 1995-96.

Despite state efforts to address the inequities, the changes to Rhode
Island's finance system had almost no effect on the funding gap
between wealthy and poor districts, which changed from 0.19 to 0.20,
as shown in figure 3.1.  For the poorest districts, total funding
increased by $911 per weighted pupil; funding to the wealthiest
districts increased by $1,040 (see table 3.4).

                               Table 3.4

                  Changes in Rhode Island's Education
                 Funding, School Years 1991-92 to 1995-
                                   96

                          Poorest districts      Wealthiest districts
                        ----------------------  ----------------------
                         1991-   1995-  Change   1991-   1995-  Change
Funding category            92      96      \a      92      96      \a
----------------------  ------  ------  ------  ------  ------  ------
Total\b                 $5,054  $5,965    $911  $6,622  $7,662  $1,040
State\b                  2,832   3,984   1,152   1,721   1,664     -57
Local\b                  2,222   1,982    -240   4,901   5,998   1,097
Local tax effort\c       16.57   13.75   -2.82   14.52   14.33   -0.19
----------------------------------------------------------------------
\a Dollar difference (1995-96 dollars less 1991-92 dollars).

\b Funding figures are in terms of per weighted pupil.  Dollar
amounts have not been adjusted for inflation.

\c Local tax effort for each group--poorest districts and wealthiest
districts--is the amount of local revenue raised by all districts
within the group for every $1,000 of district property wealth.  We
divided the state student population by quintiles according to
district tax base wealth.  The poorest and wealthiest groups in this
table have from 16 to 23 percent of the student population.

Despite an increase in equalization effort by increasing state share,
between school years 1991-92 and 1995-96, Rhode Island could not
narrow the funding gap in part because of the poorest districts'
response--a large decrease in local tax effort--to changes in the
state aid program and the difference in the growth of districts' tax
bases.  Because of the restructuring of its school finance system,
state aid increased in the poorest districts by an average $1,152 per
weighted pupil; state aid to the wealthiest districts decreased by
$57.

Although most of Rhode Island's school districts, poor and wealthy
alike, reduced their local tax effort, the poorest districts'
decrease was much larger than the wealthiests'.  The large increase
of $1,152 per pupil (41 percent) in state aid may have prompted the
poorest districts to reduce their local tax effort by $2.82 per pupil
(a 17-percent decrease), resulting in a decrease in local revenue of
$240 per weighted pupil.  Although the wealthiest districts slightly
decreased their tax effort by $0.19 per pupil (a 1-percent decrease),
they also had large increases in property values (24 percent compared
with 7.5 percent for the poorest).  The resulting increase of $1,097
per weighted pupil in local funding was more than enough to offset
the decline in state aid.  Therefore, the funding gap changed little.
The ability of Rhode Island's districts to change their local tax
effort in response to changes in state aid undermined state efforts
to close the funding gap.

--------------------
\36 That is, for a given amount of total expenditures, the state
reimbursed poor districts at higher rates than wealthier districts.

\37 The state guaranteed a minimum-share ratio of each school
district's education expenditures.  During 1991, each district
received a minimum share of 28 percent; this share declined to 15
percent in fiscal year 1993 and had been eliminated by 1995.

      LOUISIANA'S FUNDING GAPS
      WIDENED
-------------------------------------------------------- Chapter 3:3.4

Before the 1992-93 school year, Louisiana allocated state funding to
its school districts mainly on the basis of teacher and staff costs
associated with district enrollment size.  The state made little or
no adjustment for differences in a district's ability to raise local
revenue or for student need-related cost differences.  As a result,
some affluent districts received more state funding than poorer
districts because they had higher teacher costs, according to a state
official.  The main source of local revenue for districts was the
sales tax.  Property tax revenue was limited because of a homestead
exemption\38 and an industrial exemption,\39 which limited tax
revenue from certain companies.  Affluent districts often generated
more local revenues with lower tax rates than poorer districts
because they had higher levels of sales or property tax bases,
according to officials.

When the oil crisis forced reduced state funding for education, it
highlighted the unfairness of the state's finance system.  This
awareness led to a voter-approved constitutional amendment that
required BESE to recommend a more equitable education funding
formula.  Thus, in 1992, BESE proposed and the state legislature
approved a new funding formula to target more funding to less wealthy
districts.  The state also changed how it measured district wealth by
using an adaptation of the representative tax system.  This system
calculates each district's ability to raise revenue for education by
estimating the combined total sales and property tax revenue a
district could raise at the state average sales and property tax
rates.  The new funding formula is a two-tiered formula.  The first
tier provides each district a basic funding level with additional
funding provided for the increased costs of educating students such
as those who are at risk or need remedial or special education.  The
state share of a district's basic funding level is the difference
between the basic level and the amount the district could raise if it
were to apply the recommended tax rate.  The amount of local revenue
the state calculates as a district's ability to pay is only for
determining the state allocation, however; districts are not required
to raise the local revenue.  To raise the overall funding level for
education, the state established a second tier to provide an
incentive for districts to raise local revenues beyond the amount
required by the funding formula's first tier with a potential state
match of up to 40 percent.  The amount of additional funding a
district receives is based on its wealth--poorer districts receive
more than wealthier districts.

Despite changes to Louisiana's finance system, the funding gap
between the wealthiest and poorest districts slightly increased from
0.24 to 0.26, as shown in figure 3.1.  More specifically, Louisiana's
poorest districts' total funding increased by $503 per weighted
pupil; funding to the wealthiest districts increased by $724 per
weighted pupil as shown in table 3.5.

                               Table 3.5

                    Changes in Louisiana's Education
                 Funding, School Years 1991-92 to 1995-
                                   96

                          Poorest districts      Wealthiest districts
                        ----------------------  ----------------------
                         1991-   1995-  Change   1991-   1995-  Change
Funding category            92      96      \a      92      96      \a
----------------------  ------  ------  ------  ------  ------  ------
Total\b                 $3,348  $3,852  $503\c  $4,279  $5,003    $724
State\b                  2,443   2,848     405   2,419   2,327     -92
Local\b                    905   1,004      99   1,860   2,676     816
Local tax effort\d        1.16    0.98   -0.18    0.85    0.90    0.05
----------------------------------------------------------------------
\a Dollar difference (1995-96 dollars less 1991-92 dollars).

\b Funding figures are in terms of per weighted pupil.  Dollar
amounts have not been adjusted for inflation.

\c The difference is due to rounding.

\d Local tax effort was calculated on the basis of a ratio of local
revenue dollars raised for every dollar that could have been raised
at an average tax rate using a combination of property and sales tax.
Each group represents approximately 20 percent of the state's student
population.

Between school years 1991-92 and 1995-96, Louisiana's funding gap
slightly increased despite the state's increased equalization effort
because wealthy districts increased their tax effort and poor
districts decreased their tax effort, leading to changes in local
revenue that undermined the effects of the state's modest
equalization effort.  Under the new system, state aid increased to
the poorest districts an average of $405 per weighted pupil; state
aid to the wealthiest districts declined by $92.  This increase in
targeting effort would normally be expected to narrow funding gaps
among districts, but in Louisiana it did not.

With the implementation of the new funding formula, the wealthiest
districts increased their local tax effort by $0.05 per pupil (a
6-percent increase).  This increase in tax effort coupled with a
35-percent increase in tax base helped to increase local revenue by
$816 per weighted pupil and served to more than offset the loss in
state aid.  Although the amount of local revenue raised by the
poorest districts increased by $99 per weighted pupil, the increase
reflects a 32-percent increase in their tax base and not their tax
effort, which fell by $0.18 per pupil (a 16-percent decrease).  The
poor districts' tax effort declined despite state financial
incentives to increase it, although it remained higher than that of
the wealthiest districts.

--------------------
\38 According to the homestead exemption, personal residences with a
fair market value of $75,000 or less are exempt from school
district-levied property taxes.

\39 Industry receives a 10-year property tax exemption as an
inducement to locate and expand in the state.  The exemption includes
education revenue.

   CONCLUSION
---------------------------------------------------------- Chapter 3:4

Achieving student equity among a state's school districts is
difficult.  Legal challenges, state budget concerns, or the state's
voters generally drive changes to a state's elementary and secondary
education funding policies.  In most states, however, education
represents a large share of a state's overall expenditures, and
decisions are made in a political environment that generally requires
compromise.  Even in states that successfully negotiate compromises
among several competing interests--students, taxpayers, and advocates
for local control of education--the envisioned levels of funding
equity among school districts may not be reached.  The tools that
states use to equalize district tax bases--increased state share of
total education costs, increased targeting of state funds to poor
districts, or both--may not be enough unless the state is willing to
adopt policies that control local tax effort.  In the states we
reviewed, Oregon and Kansas closed the funding gap because, in
addition to their strong equalization efforts, they took steps to
control the tax effort of districts, as shown in table 3.6.  On the
other hand, efforts to close the funding gap in Rhode Island and
Louisiana did not succeed because their equalization efforts, though
positive, were modest and their poorer districts provided tax relief
in response to the increased targeting of state aid to poorer school
districts.

                               Table 3.6

                Strategies and Results of State Efforts
                 to Reduce Funding Gaps in School Years
                          1991-92 and 1995-96

                               Strategy
                  ----------------------------------
                  Strengthen        Limit
                  equalization      local tax         Result--funding
State             policies          effort            gap reduced
----------------  ----------------  ----------------  ----------------
Oregon            yes               yes               yes

Kansas            yes               yes               yes

Rhode Island      yes               no                no

Louisiana         yes               no                no
----------------------------------------------------------------------

STATE AND FEDERAL POLICIES CAN
HELP REDUCE FUNDING GAPS
============================================================ Chapter 4

Both states and the federal government can play a role in reducing or
even eliminating funding gaps between poor and wealthy districts.  At
the state level, three tools can help reduce funding gaps:
increasing the state's share of total funding so that differences in
local funding will have proportionately less effect on overall per
pupil spending, increasing state-level efforts to target funds
specifically to poor districts, and constraining district tax
behavior.  Deciding what combination of these three tools should be
used depends on the equity outcomes that a state wants to accomplish
for students and taxpayers.

In our cost analysis of alternatives to completely eliminate state
funding gaps in school year 1991-92, we found that the policy changes
states would have to effect can be substantial.  Overall, state
efforts to eliminate their funding gaps while requiring districts to
maintain their existing tax effort would require the median state
share of funding to increase from about 50 to 71 percent--assuming no
change in the state's targeting effort.  Alternatively, if states
were to rely solely on their targeting effort without increasing
their state share, a more than 200-percent increase in the median
state effort to target funds to poor districts would need to occur.
Such an increase would mean that some states would have to require
wealthy districts to forego state aid altogether and possibly even
contribute some of their local revenues to benefit poorer districts.

At the federal level, two provisions in the Improving America's
Schools Act of 1994 encourage states to equalize funding among school
districts.  Both provisions focus on funding outcomes only--rewarding
states for achieving a specific degree of student funding equity.
Neither provision considers the extent to which taxpayers in poorer
school districts may have contributed to this outcome by making a
greater local tax effort than taxpayers in wealthier districts.

   STATE OPTIONS FOR REDUCING
   FUNDING GAPS
---------------------------------------------------------- Chapter 4:1

State options for reducing funding gaps involve using policy tools
governing state equalization efforts and local taxing behavior.
Which policy tools a state may choose to implement depends upon the
outcomes it wants to achieve.

      POLICY TOOLS FOR REDUCING
      FUNDING GAPS
-------------------------------------------------------- Chapter 4:1.1

States have three tools by which to reduce funding gaps.  The first
two involve state equalization policies:  increasing the state share
of funding and increasing state targeting.  Most states would
probably find it easier to use a combination of these two tools
rather than rely on one exclusively.  To close the funding gap,
however, a state may also need to use the third tool:  constraining
local tax behavior.  A state may use this tool in three ways:  (1)
holding district tax efforts at current levels, (2) setting an equal
local tax effort, or (3) setting a required minimum level of tax
effort.

         INCREASING STATE SHARE
         AND TARGETING EFFORT
------------------------------------------------------ Chapter 4:1.1.1

A state's equalization effort can provide more funding to poorer
districts in two ways:

  -- by increasing the state share of total funding so that
     differences in local funding will have proportionately less
     effect on overall student expenditures and

  -- by increasing its targeting effort; that is, a state can adjust
     its approach so that aid goes more exclusively to poor
     districts.

Some states already extensively target their aid to poor districts,
while other states do not.  At its most extreme, this redistribution
could require the state to recapture local funding raised above a
maximum amount and redistribute that funding to other, poorer school
districts.

Although some states may be able to choose between increasing their
share of total funding or increasing their targeting effort, many
states would probably need to increase both to reduce the financial
impact on the state budget and on wealthier districts.  The more a
state can afford to increase its education spending, the less it
would have to redistribute state funding--and possibly local
funding--from wealthier to poorer school districts to reduce funding
gaps.  Regardless of the method used, increasing a state's
equalization effort automatically improves equity for taxpayers
because it allows poor districts with a high tax effort to finance
the state average funding level per pupil with less of a tax effort.

         CONSTRAINING LOCAL TAX
         BEHAVIOR
------------------------------------------------------ Chapter 4:1.1.2

Because local funding raised mainly through property taxes accounts
for half of the nonfederal revenue that funds education, imposing tax
constraints on localities may be necessary to close the funding gap
among districts.  Consequently, in pursuing student funding equity,
states may have to confront taxpayer equity issues.

Tax constraints may be necessary because unconstrained local reaction
to changes in state equalization aid can undermine the state's intent
to improve student funding.  For example, poor districts receiving
additional state aid may use it for tax relief rather than for
closing funding gaps.  Similarly, wealthy districts receiving little
or no state aid may raise local taxes, perpetuating the gaps.  This
kind of fiscal substitution has occurred, according to our research
(see ch.  3).  Therefore, ensuring that equalization efforts can
reduce funding gaps will probably require states to constrain local
tax effort to some degree.

Tax constraints pose taxpayer equity issues.  Such constraints may
require districts to maintain existing tax efforts or to put forth a
specified equal level of effort or a minimum level of effort.
Assuming that the pattern of district tax efforts in school year
1991-92 still holds true, constraints that maintain the current tax
effort would leave poor districts in most states making a greater tax
effort than wealthy districts but still unable to raise as much
funding as wealthy districts because of their less valuable tax base.
Taxpayers may view constraints that require an equal or minimum level
of tax effort beneficial, but the constraints alone--without
increasing the state's equalization efforts--would not guarantee that
districts would receive equal money for an equal effort.

      POLICY OPTIONS EFFECT
      DIFFERENT OUTCOMES
-------------------------------------------------------- Chapter 4:1.2

The policy tools a state ultimately chooses to implement depend on
the outcomes a state wants to achieve.  States have four possible
options to consider in reducing funding gaps, according to our
research.  Table 4.1 shows the impact of each option on different
policy goals affecting students and taxpayers.  These policy goals
are reducing funding gaps, equalizing local tax effort, improving the
amount of total revenue a district's taxpayers can expect to obtain
with an equal tax effort, and allowing freedom of local tax choice.
These policy options assume that a state would increase its
equalization effort by increasing its share of total education
funding, increasing its effort to target funding to poor districts,
or increasing both.  Only the first option would require no tax
constraints.

                               Table 4.1

                Impact of Policy Options on Policy Goals

                                   Policy options
              --------------------------------------------------------
                                          3. Increase   4. Increase
              1. Increase   2. Increase   equalization  equalization
              equalization  equalization  effort and    effort and
              effort\a and  effort and    require       require
              no tax        maintain tax  equal tax     minimum tax
Policy goals  constraint    effort        effort        effort
------------  ------------  ------------  ------------  --------------
Reduce        Conditional\  Yes           Yes           Yes
funding gap   b

Equalize      Conditional\  No\d          Yes           No\e
local tax     c
effort

Improve       Yes\f         Yes\f         Yes\f         Yes\f
district
yield for a
given tax
effort

Allow for     Yes           No            No            Yes
local tax                                               (somewhat)\g
choice
----------------------------------------------------------------------
\a An increase in the equalization effort represents an increase in
state share, state targeting, or both.

\b This option might reduce funding gaps, depending on the extent to
which districts engage in fiscal substitution.  If no fiscal
substitution occurs, funding gaps will be reduced.

\c This option may better equalize tax effort, depending on the
extent to which districts engage in fiscal substitution.  In states
where poor districts are making a greater tax effort, wealthy
districts' raising their tax effort relative to poor districts will
equalize local tax effort.

\d Because poor districts in most states make a greater tax effort
than wealthy districts, a requirement to maintain this effort would
perpetuate unequal tax efforts among districts rather than eliminate
them.

\e Poor districts could choose to make a greater tax effort than the
minimum.  If this effort were also greater than the effort of wealthy
districts, then tax efforts would remain unequal among districts.

\f Because equalization effort represents the proportion of the state
average funding level (state and local) that can be financed with an
equal local tax effort, any increase in equalization effort will
further improve this policy goal.

\g Districts would be free to choose their tax rate as long as it did
not drop below the minimum rate.

In the four policy options shown in table 4.1, the state's decision
on controlling local districts' taxing effort differs.  The decision
to control local tax behavior and the type of constraint used have
different implications for school funding and taxpayers.  The
advantages and limitations of states' using the various options
appear in table 4.2.

                               Table 4.2

                Implications of Options for Controlling
                            Local Tax Effort

Option                  Advantages              Limitations
----------------------  ----------------------  ----------------------
No tax constraint       Locality maintains      Fiscal substitution
                        control                 possible: local
                                                reactions to increased
                                                state equalization
                                                efforts may undermine
                                                those efforts

Maintain tax effort     Reflects local choice   Localities cannot make
                        at a point in time      other choices

                        Lessens disparity in    Maintains higher tax
                        funding among           efforts of poor
                        districts               districts

                                                Limits future spending
                                                in wealthy districts

Require equal tax       All taxpayers paying    No local tax choice
effort                  at the same rate

                        Lessens disparity in
                        funding among
                        districts

Require minimum tax     Allows limited local    Would require review
efforts                 choice                  and revision of tax
                                                rates regularly
                        Increases equality of
                        tax efforts             Educational
                                                appropriations less
                        Best suited for states  predictable
                        where poor districts
                        make a less than
                        average effort
----------------------------------------------------------------------

      COSTS VARY AMONG OPTIONS
-------------------------------------------------------- Chapter 4:1.3

The policy options and their permutations for reducing the funding
gaps and equalizing tax efforts involve varying costs to the state.
In general, reducing the funding gap alone would cost the state less
than any effort that also equalizes tax efforts among districts.  The
cost would be less because the state would rely on districts with
high tax efforts to continue closing part of the gap on their own.  A
state using this approach would need to provide only enough money to
raise funding in poor districts to a level comparable with funding in
wealthier districts.  If a state chose to both reduce funding gaps
and equalize districts' tax effort, its cost would tend to be higher.
For most states, the funding gaps are so great that reducing or
eliminating the gaps entirely would require substantially greater
state funding, targeting, or both.

   ELIMINATING FUNDING GAPS WOULD
   REQUIRE MAJOR CHANGES IN MOST
   STATE FINANCE SYSTEMS
---------------------------------------------------------- Chapter 4:2

Illustrating the financial implications of reducing funding gaps is
difficult because the requisite decisions involve judgments about (1)
the extent to which states want to close the gaps, (2) whether states
want to address differences in tax efforts as well as funding gaps,
and (3) what combination of tools they choose to employ.  Because the
number of possible combinations of these factors is nearly endless,
we cannot address the consequences of every potential combination.

To give a sense of the range of possibilities, however, we analyzed
alternatives for eliminating the funding gaps under two scenarios:
first, by allowing districts to maintain their school year 1991-92
tax effort, and, second, by requiring an equal tax effort for all
districts.  For each scenario, we assumed each state's aim would be
to eliminate funding gaps entirely either by relying solely on
increases in the state share of funding or by relying solely on
increases in tax base targeting.  Relying solely on increases in the
targeting effort to eliminate funding gaps in some states might
require recapturing some funds raised locally by wealthy districts
and redistributing these funds to poor districts.

The national median state share of total (state and local) funding
for elementary and secondary education was 48 percent in school year
1991-92.  The median targeting effort was 23 percent.\40 If states
were to eliminate the funding gap while holding district tax efforts
at their 1991-92 levels, the median state share of funding would need
to increase to 71 percent or the median targeting effort would need
to increase to 73.4 percent.  Eliminating the funding gap while
equalizing tax effort raised these percentages to 81 and 108 percent,
respectively.  In school year 1991-92, only four states provided more
than a 71-percent share of total (state and local) funding, and only
two states had a targeting effort above 73 percent.

   Figure 4.1:  Estimates of
   Levels of Effort Needed to
   Eliminate Funding Gaps

   (See figure in printed
   edition.)

Note:  State share is calculated as a percentage of total state and
local funding, excluding federal dollars.

--------------------
\40 State targeting is measured by the income elasticity of state
funding, where district income represents the tax base per pupil.
The income elasticity is the percentage difference in state funding
that results from a 1-percent change in district income.  In this
report, we multiplied the elasticity by 100 to measure the change in
state funding associated with a 100-percent change in tax base
wealth.

      STATES VARY WIDELY
-------------------------------------------------------- Chapter 4:2.1

National averages provide some indication of the overall effort
needed to eliminate funding gaps, but they obscure the significant
variation at the state level.  Although substantial increases in
state funding or targeting effort would be needed to fully eliminate
funding gaps nationwide, a few states could do so with far less
drastic changes than others.  For example, Colorado and Illinois vary
considerably in the size of their funding gaps, the share of total
(state and local) funding they provide, and the extent of their
targeting effort:

  -- In school year 1991-92, Colorado's wealthiest districts had just
     8 percent more funding per weighted pupil than its poorest
     districts.\41 Colorado provided 44 percent of the total (state
     and local) funding for education, and its targeting effort in
     providing this funding was 75 percent.\42

  -- In school year 1991-92, Illinois's wealthiest districts had 67
     percent more funding per weighted pupil than its poorest
     districts.  Illinois provided 33 percent of the funding for
     education, and its targeting effort was 23 percent.

These two states would face markedly different degrees of change in
equalizing their funding levels among districts (see table 4.3).  If
Illinois did not increase its targeting effort to further
redistribute state and local funding from wealthy to poor districts,
then it would have to increase its share of funding substantially.
It would have to raise its state share from 33 percent to at least 78
or 81 percent, depending on whether it wanted just to close gaps or
to equalize tax effort as well.  In contrast, Colorado would have to
increase its state share of funding from 44 to at least 45 or 57
percent.  Similarly, if the two states chose not to increase the
state share of education funding, then the change in targeting effort
required to eliminate the funding gap would also be significantly
higher in Illinois than in Colorado.

                                        Table 4.3

                         Changes Needed to Eliminate Funding Gaps
                                 in Colorado and Illinois

                       State share of total funding,     State targeting effort, given
                         given school year 1991-92     school year 1991-92 state share of
                              targeting effort                      funding
                       ------------------------------  ----------------------------------
                                            Needed to                           Needed to
                             In              equalize                            equalize
              Size of    school    Needed  tax effort   In school   Needed to  tax effort
              funding      year  to close   and close  year 1991-       close   and close
State           gap\a   1991-92    gaps\b        gaps          92      gaps\b        gaps
----------  ---------  --------  --------  ----------  ----------  ----------  ----------
Illinois          67%       33%       78%         81%         23%        165%        201%
Colorado           8%       44%       45%         57%         75%         80%        130%
-----------------------------------------------------------------------------------------
\a This column represents the ratio of funding in the wealthiest
group of districts compared with the poorest group.  Each group
represents approximately 20 percent of the student population in the
state.

\b With existing tax effort.

These differences typify the wide variation among states.  Figure 4.2
shows each state's share of total funding and targeting effort in
school year 1991-92 and the change necessary to eliminate funding
gaps assuming an equal tax effort.  The curved line running laterally
through the figure indicates the various combinations of state share
and targeting effort that would produce an equalization effort of 100
percent.  If a state achieves 100-percent equalization, it means that
the state's school finance system enables all districts to finance
100 percent of the state average funding level per pupil with an
equal tax effort.

   Figure 4.2:  States Vary in the
   Policy Changes Needed to
   Achieve Full Equalization With
   an Equal Tax Effort

   (See figure in printed
   edition.)

Note:  Nevada targeted more state funds to poor districts than was
necessary to achieve 100-percent equalization.  As a result, poor
districts in Nevada were able to finance the state average funding
level with less tax effort than wealthy districts.

To eliminate the funding gap in Florida, for example, the state could
choose to increase its share of total funding from 53 to about 62
percent or increase its targeting effort from 62 to about 89 percent.
For other states, such as Illinois, Nebraska, and Massachusetts, the
changes needed to both state share or targeting effort would be much
more substantial.

--------------------
\41 Funding has been adjusted for statewide differences in geographic
and student need-related costs.

\42 A targeting effort of 75 percent meant that for every 100-percent
increase in district resident income per pupil above the state
average, state aid declines by 75 percent from the average state aid
per pupil.  By contrast, Illinois' targeting effort of 23 percent
meant that a district 100 percent above the state average income per
pupil receives only 23 percent less state aid per pupil than the
state average.

   FEDERAL INCENTIVES ENCOURAGE
   STATES TO EQUALIZE FUNDING
   LEVELS
---------------------------------------------------------- Chapter 4:3

At the federal level, two programs in the Improving America's Schools
Act of 1994 have incentives that encourage states to equalize funding
levels among districts.  Both programs measure only the extent to
which education funding is equalized.  Neither program considers the
extent to which a state's equalization effortï¿½-rather than the
extraordinary tax effort of poor districts--contributes to reducing
funding gaps among districts.

In school year 1991-92, the Department of Education certified that
four states--Alaska, Arizona, Michigan, and New Mexico--had equalized
their finance systems.\43 With the data we now have available, we
found that two of these states (Arizona and Michigan) had
equalization efforts that were less than the national average of 62
percent.  More importantly, the poor districts in three of the four
states were making a greater tax effort than the wealthy districts,
using the additional local funding raised to narrow even further or
eliminate the funding gaps.  (See table 4.4.)

                         Table 4.4

           Poor Districts' Tax Efforts Relatively
           High in Certified States, School Year
                          1991-92

                                             Ratio of poor
                                            districts' tax
                                        efforts to wealthy
                          Equalization      districts' tax
Certified state               effort\a           efforts\a
------------------  ------------------  ------------------
Alaska                           76.4%                1.55
Arizona                          57.7%                2.57
Michigan                         48.5%                0.81
New Mexico                       85.0%                2.84
----------------------------------------------------------
\a Equalization effort and tax effort in this table were calculated
on the basis of resident income per weighted pupil.

--------------------
\43 Under the Impact Aid program, the Department of Education must
certify whether a state meets a certain equalization level.  If the
state does, it may reduce state aid payments to offset the impact aid
received by school districts.

   CONCLUSION
---------------------------------------------------------- Chapter 4:4

For many states, the main method for reducing or eliminating funding
gaps will probably be an increase in the state share of total
education funding, an increase in the state effort to target funding
more specifically to poor districts, or an increase in both.  The
changes required would tend to be even greater if a state also sought
to equalize tax effort among districts to alleviate poorer districts'
making an extraordinary tax effort to raise the state average funding
level per pupil.  Even the most substantial state effort to improve
funding equalization, however, may not reduce funding gaps unless it
is accompanied by some constraints on local tax behavior.  Where poor
districts with a high tax effort use new state aid partly for tax
relief and where wealthy districts replace reductions in state aid
with increased local revenue, funding gaps may remain and in some
cases even grow.  Although the federal government has two policy
tools that might further encourage greater funding equity, both
reward states for funding outcomes that achieve a certain degree of
equalization without considering the extent to which these outcomes
may result from extraordinary local tax efforts in poor districts.

CONCLUSIONS, MATTER FOR
CONGRESSIONAL CONSIDERATION, AND
AGENCY COMMENTS
============================================================ Chapter 5

   CONCLUSIONS
---------------------------------------------------------- Chapter 5:1

Reducing or eliminating funding gaps between poor and wealthy school
districts presents states and the federal government with difficult
policy decisions.  For states, the first difficult decision is who
will bear most of the costs of reducing these funding gaps:  the
state government or wealthier school districts.  The states' second
decision involves whether their effort--which may be
substantial--should be accompanied by constraints on local tax
behavior.  If so, states must decide which controls they can impose
on localities.  The less expensive alternatives are most likely to be
controversial because they would severely restrict district tax
choices and in many instances leave taxpayers in poor districts
making a substantially greater tax effort than taxpayers in wealthy
districts.  Alternatives that would give taxpayers in poor districts
some tax relief or allow school districts much greater freedom to
choose their rates are also most likely to be controversial because
they would require much more state money.

For the federal government, the first policy decision involves
whether reduced funding gaps should continue to be the main focus of
federal programs encouraging equalization or whether these programs
should also focus on states' efforts to equalize funding between poor
and wealthy districts.  The second decision involves whether to
increase targeting to poor students, knowing that such targeting can
affect funding equalization.

The share of education funding a state finances compared with local
funding and its effort to target that funding to poor districts
determine a state's equalization effort.  (See ch.  2.) The higher
its share of total funding, the less a state needs to target that
funding to poor districts to achieve a given equalization effort.
The decision to increase the state funding share or the state
targeting effort is difficult for most states because it addresses
who will pay for increased equalization.  A decision to increase the
state funding share is a decision to fund equalization from state
government resources.  A decision to increase targeting effort is a
decision to redistribute existing state funding from wealthier
districts to poorer districtsï¿½-in essence, having wealthier districts
bear part of the cost to increase equalization.  Where funding gaps
are particularly great and the state funding share is relatively low,
increased targeting might also involve redistributing local funding
from wealthy to poor districts.  Such recapturing can also be
contentious.

In addition, reducing local funding and holding state funding steady
would also increase equalization by increasing the state share of
total funding.  Although this action would effectively increase
equalization effort, it would also reduce total education funding in
the state--which might have harmful effects.

States must also decide whether to control local tax behavior.
Although a state might reduce funding gaps without such constraints,
those reductions would not be certain.  (See ch.  3.) Constraining
local tax behavior may be controversial, however, because it means
the state will partially control local choices on spending for
education services and, in some cases, raise taxes.  For example,
mandating that all districts maintain their local effort would be the
state's less costly option for reducing or eliminating funding gaps.
(See ch.  4.) This choice, however, would keep poor districts with
high tax efforts from using any new state funding to obtain even
modest tax relief.  By mandating an equal tax effort instead, states
may be able to give tax relief to poor districts with high tax
efforts, but this choice may raise taxes in many other, often
wealthier, school districts.  It also would be more costly for the
state to implement.  Options to maintain or to equalize local tax
efforts would limit the funding districts could raise for education
services as well.

The tax constraint option that allows the greatest degree of local
choice involves the state setting a minimum tax effort.  This option
would be difficult to implement, however, because the statewide
minimum effort must be at least equal to the tax effort of the
state's wealthiest districts; a lower tax effort by poor compared
with wealthy districts would exacerbate funding gaps.  The state
would have to regularly monitor district tax efforts statewide and,
if necessary, raise the minimum effort to lessen the funding gaps.

For the federal government, the difficulty is determining whether
federal programs encouraging equalization should continue to focus
only on reduced funding gaps between poor and wealthy districts or
whether these programs should also consider the extent to which state
policies are responsible for reducing those gaps.  Two federal
programs with equalization components operate to effectively reward a
state for reducing funding gaps even if the state has not made much
effort to equalize funding.  Some states with low funding gaps have
accomplished this outcome in part through extraordinary taxpayer
effort in the poorest school districts.

To encourage states to increase their equalization effort and reduce
funding gaps among districts, federal policymakers could use both a
performance indicator of state equalization effort and an indicator
of funding gaps to reward states for their performance.  To encourage
states to increase their equalization effort, regardless of its
impact on funding gaps, federal policymakers could replace the
performance indicator of a state's funding gap with one that measures
only state efforts to equalize funding.  In either case, a
performance indicator of state equalization efforts used in
combination with or instead of an indicator of funding gaps would
better ensure that federal policy rewards those states whose funding
policies lead to greater funding equity.

   MATTER FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 5:2

If federal policymakers want to encourage greater state efforts to
reduce funding gaps between poor and wealthy districts, then the
Congress may wish to consider establishing additional incentives or
incentives different from those that federal programs now have.

   AGENCY COMMENTS
---------------------------------------------------------- Chapter 5:3

The Department of Education provided written comments and suggested
changes on a draft of this report (see app.  VI).  We revised our
report on the basis of these comments and suggestions as they related
to federal education programs when applicable.

The Department said that this report provides important information
on how well state funding is targeted to poor school districts.  In
addition, the Department noted, as we have shown in an earlier
report, School Finance:  State and Federal Efforts to Target Poor
Students (GAO/HEHS-98-36, Jan.  28, 1998), that federal funds are
more targeted to poor students than state funds and that federal
education funding plays an important role in improving equity.
Department officials said, however, that a federal policy with
financial incentives for encouraging states to equalize funds would
probably be insufficient without a substantial increase in funding
for the title I and Impact Aid programs.  In addition, they said that
such a policy pursued under title I Education Finance Incentive
Grants would shift funds from high-poverty states to low-poverty
states under the current formula.

We acknowledge that this redistribution of funds between states could
occur under the current title I Education Finance Incentive Grant
formula.  In two previous reports, Remedial Education:  Modifying
Chapter 1 Formula Would Target More Funds to Those Most in Need
(GAO/HRD-92-16, July 28, 1992) and School Finance:  Options for
Improving Measures of Effort and Equity in Title I (GAO/HEHS-96-142,
Aug.  30, 1996), we provided suggestions to the Congress on how to
improve targeting to states with high numbers of poor students.  If
those suggestions were adopted along with a performance measure
encouraging states to increase equalization effort as suggested in
this report, better equalization could be encouraged with the result
of more funding to high-poverty states.

OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

   OBJECTIVES
--------------------------------------------------------- Appendix I:1

The objectives of this study were to (1) determine what factors most
contribute to reducing the size of funding gaps between poor and
wealthy school districts, (2) identify states that substantially
changed their school finance systems between 1991-92 and 1995-96 and
determine the effects of the change on the funding gaps between
wealthy and poor districts, and (3) determine what kinds of changes
are needed for states to more fully address these funding gaps.

   SCOPE
--------------------------------------------------------- Appendix I:2

For the first and third objectives, we conducted a state-level
comparative analysis of equalization efforts, the relative local tax
efforts of poor and wealthy districts, and income-related funding
gaps in all states except Hawaii for school year 1991-92.\44 The
aggregate state-level data used in our analysis were based on state
and local funding in regular school districts only, with students in
grades kindergarten to 12.

Consequently, the state-level analyses excluded administrative
districts and districts serving unique student populations, such as
vocational or special education schools.\45

The analyses also excluded districts that lacked data for critical
variables, such as poverty level, as well as small districts with
extreme outlying values of income per pupil.  The 2,235 districts
excluded from the state-level comparative analysis had an enrollment
of 335,558 students.  The state-level database used in our analysis
contains composite or aggregated data on 14,425 districts, with a
total of 41,204,610 students, representing 99.2 percent of the
students in 49 states.

For the second objective, we analyzed the school finance systems of
four states:  Kansas, Louisiana, Oregon, and Rhode Island.  For each
state, we analyzed how changes to state equalization policies and
constraints on local tax efforts may have affected both the relative
tax effort of poor and wealthy districts and the size of funding gaps
from school years 1991-92 to 1995-96.  Rather than basing the funding
gaps discussed in this analysis on income, however, we calculated the
gaps on the basis of the principal tax base measure employed in each
state, which was property wealth in Kansas, Oregon, and Rhode Island
and property and sales tax capacity in Louisiana.

Similar to the national state-level analysis, we analyzed state and
local funding in the four states in regular school districts only,
with students in grades kindergarten to 12.  We excluded
administrative districts and districts serving unique student
populations from review.  We also excluded districts that lacked data
for critical variables.  In Oregon and Rhode Island, districts were
consolidated or newly created between school years 1991-92 and
1995-96, so the number of districts differed in the 2 years of our
analysis.  The final four-state database used in our analysis
contained 302 districts in Kansas for both school years 1991-92 and
1995-96; 65 districts in Louisiana for both years; 286 districts in
Oregon for school year 1991-92 and 230 for school year 1995-96; and
37 districts in Rhode Island for school year 1991-92 and 36 for
school year 1995-96.  The database represents 99.6 percent of the
public school students in these four states.

--------------------
\44 We excluded Hawaii from the analysis because our source of data
was a database used for a previous report that conducted a
district-level analysis.  Hawaii's school system is considered one
district, so no comparisons could be made about state allocations to
different districts.  Similarly, the District of Columbia and five
U.S.  territories (American Samoa, Guam, Northern Marianas, Puerto
Rico, and the Virgin Islands) have one-district systems and were
excluded from the database.  The previous report using this database
was School Finance:  State Efforts to Reduce Funding Gaps Between
Poor and Wealthy Districts (GAO/HEHS-97-31, Feb.  5, 1997).

\45 Districts in the Common Core of Data (CCD) with agency type codes
3 to 7 and school district codes of 4 to 7 were excluded from our
analysis.

   DATA SOURCES
--------------------------------------------------------- Appendix I:3

This report used two sources of data.  For the national state-level
analyses, we used a database developed for a recent report.\46 The
data were based mainly on revenue and demographic data obtained from
the Department of Education's Common Core of Data (CCD) for the
1991-92 school year, the most current data available for a national
set of districts.  Data for the CCD were submitted by state education
agencies and edited by the Education Department.  Data for per capita
income and population were obtained directly from the 1990 census
because they were not available in the CCD.  Some of the data in our
database were obtained directly from state education offices,
imputed, or adjusted on the basis of consultations with Department of
Education experts.  Missing cost index data were imputed on the basis
of the recommendation of the school finance expert who developed the
cost index, Jay Chambers.  Missing income per pupil data were imputed
using median housing value data.

To determine the funding changes made by the four states in our study
and the effect of these changes on funding gaps, we obtained
documentation directly from the states' departments of education or
state legislative officials for each state's education finance system
and revenue and demographic data for the years in our analysis.\47

--------------------
\46 GAO/HEHS-97-31, Feb.  5, 1997.

\47 Because school year 1991-92 poverty data for Oregon and Rhode
Island school districts were not available from the state, we
estimated the poverty rates using other data sources.

   METHODOLOGY
--------------------------------------------------------- Appendix I:4

Our national state-level analyses and our four-state case study
analyses used the following funding model,\48 figure I.1, which
outlines the relationships between funding gaps and the key factors
affecting these gaps.

   Figure I.1:  Key Factors
   Affecting Funding Gaps

   (See figure in printed
   edition.)

The two key factors in the middle row (state equalization effort and
relative local tax effort) influence funding gaps between wealthy and
poor districts.  Each of these in turn is determined by decisions
made at the state or local level, represented by the top row of
boxes.  For example, state policies regarding the size of state
shares and the amount of targeting to poor districts determine
equalization effort.  State (and local) policies that affect local
district tax effort and the choice of district residents to tax
themselves determine the relative local tax effort of districts.

To determine what factors contribute most to reducing funding gaps
between poor and wealthy school districts, we used a minimum
foundation equalization model (described in more detail in app.  II).
This model views each state as though it were distributing state
funds according to a foundation program in which the state ensures a
minimum or foundation amount of funding per pupil with a common
minimum local tax effort.

To identify states that had changed their finance system since school
year 1991-92, targeting more funding to low-wealth districts, we
reviewed the results of a telephone survey we conducted in 1996 in
which we asked state education finance officials in 49 states about
changes to the school finance system made between school years
1991-92 and 1995-96, the timing of the change, and a brief
description of the change.  We identified 28 states that had changed
their finance system between school years 1991-92 and 1995-96.\49 Of
those 28 states, we eliminated 24 for various reasons:  some because
we determined the state data were not sufficiently reliable or
reforms were too limited in scope or too recent for us to measure the
effects\50 or the reforms focused on targeting more funds to
high-poverty rather than low-wealth school districts.  Our final
selection of Kansas, Louisiana, Oregon, and Rhode Island was intended
to reflect differing approaches to reforming school finance systems
as well as geographic differences.

To analyze the effects of funding changes in the four case study
states, we used the same minimum foundation equalization model as in
the national analysis of funding gaps.  (App.  III provides more
information on our use of state data with this model.)

To determine what changes in state funding and tax base targeting
policies would be needed to close the income-related funding gaps
between poor and wealthy districts, we developed a mathematical model
that relates state equalization effort and local tax policies to the
size of the funding gaps.  Our analysis estimates how much a state's
share of total funding or targeting effort would have to increase to
completely eliminate rather than just reduce funding gaps among
districts.  We conducted this analysis under alternative
assumptions--assuming districts maintained school year 1991-92 tax
effort or assuming districts were all making the same effort--
regarding how states could constrain local tax policy if they were
willing or able to do so.  Appendix IV provides a more detailed
explanation of the mathematical model used for this analysis.

--------------------
\48 This model summarizes the finding from one of our previous
reports, GAO/HEHS-97-31, Feb.  5, 1997.

\49 The 21 states that reported no change in their school finance
system that targeted more funds to low-wealth or high-poverty
districts between school years 1991-92 and 1995-96 were Alaska,
Arizona, Arkansas, California, Delaware, Florida, Georgia, Illinois,
Iowa, Kentucky, Maine, Nevada, New Hampshire, New Mexico, Oklahoma,
South Carolina, South Dakota, Vermont, West Virginia, Wisconsin, and
Wyoming.

\50 We reviewed only states that had changed their finance systems by
school year 1993-94.

ESTIMATING STATES' TAX BASE
TARGETING AND EQUALIZATION EFFORTS
========================================================== Appendix II

This appendix summarizes how state equalization policies can be
modeled using a foundation program.  We used this model, which was
developed for an earlier report,\51

to estimate the state tax base targeting and equalization efforts and
income-related funding gaps used for the funding gap analysis in
chapter 2.

--------------------
\51 See School Finance:  State Efforts to Reduce Funding Gaps Between
Poor and Wealthy Districts (GAO/HEHS-97-31, Feb.  5, 1997).

   MODELING TAX BASE TARGETING
-------------------------------------------------------- Appendix II:1

In our earlier report, we modeled the distribution of state funding
to local school districts as if states were ensuring that all
districts could fund a minimum foundation amount per pupil with a
common minimum tax effort.\52 Using this assumption, we showed that
the distribution of state aid is represented by the following
formula:

   Equation II.1

   (See figure in printed
   edition.)

where

gi = a district's per pupil state grant ( = state average per pupil
grant)

ci = a district's teacher cost index adjusted for statewide
differences

vi = a district's per pupil tax base ( = state average tax base per
pupil)

 = share of total funding financed by local districts
(1- therefore represents the state share of total funding)

 = an equalization parameter that measures the extent to
which state funding is targeted to low tax base districts.

Equation II.1 shows that a district's state grant per pupil (gi/ci)
(adjusted for differences in teacher costs and expressed relative to
the average grant of all districts) is inversely related to its per
pupil tax base (vi/ci) (also adjusted for teacher cost differences
and expressed relative to the average of all districts).  It also
demonstrates that all states can be viewed as ensuring a minimum
foundation amount and that state aid is systematically related to the
value of local tax bases.  That is, states would have to target
additional state funds to low tax base districts to ensure the
minimum foundation amount in all districts.

Because the dependent and independent variables are measured relative
to their respective state averages, the slope coefficient can be
interpreted as the tax base elasticity of state aid (g.v)
evaluated at the mean.  As such, it represents the percentage decline
(or increase) in per pupil funding compared with the state average
that a district would experience for each percentage increase (or
decline) in its tax base compared with the average tax base of all
districts.  This elasticity quantitatively measures the state effort
to target additional funding to low tax base districts.  The
following formula therefore represents elasticity of state aid:

   Equation II.2

   (See figure in printed
   edition.)

Figure II.1 illustrates the tax base targeting implications of a
foundation equalizing program.  The figure compares two states that
we assume to provide the same overall amount of aid to their local
school districts; however, state A targets less aid to low tax base
districts than does state B.  Greater tax base targeting in state B
implies higher per pupil grants to poor districts compared with state
A and smaller per pupil funding in wealthier districts.

   Figure II.1:  Comparison of Two
   States With Different Tax Base
   Targeting Policies

   (See figure in printed
   edition.)

Because of the greater tax base targeting in state B, the tax base
levels at which wealthier districts would not qualify for state
funding would be lower in state B compared with state A.  As shown in
figure II.1, wealthy districts in state B would not qualify for state
aid if their per pupil tax base were more than 200 percent of the
state average; in state A, however, wealthy districts would qualify
for state funding as long as their tax base did not exceed 300
percent of the state average.

In principle, districts with tax base levels that exceeded these
break-even levels would be subject to "recapture" provisions.  That
is, they would have to contribute part of their local revenues to the
state government for distribution to other districts to ensure all
districts could fund the foundation amount with a common minimum tax
effort.  In figure II.1, districts in state B whose tax base exceeded
200 percent of the state average would be subject to recapture
provisions, while districts in state A would be subject to such
provisions if their tax bases were more than 300 percent of the state
average.

--------------------
\52 The model we used was first developed by Jerry C.  Fastrup,
published in two separate articles:  "Fiscal Equalization and Access
to Educational Resources in the New England States," Journal of
Education Finance, Vol.  22, No.  4 (1997), pp.  368-93 and "Taxpayer
and Pupil Equity:  Linking Policy Tools With Policy Goals," Journal
of Education Finance, Vol.  23, No.  1 (1997), pp.  69-100.

   MINIMUM FOUNDATION LEVEL
   DEPENDS ON STATE FUNDING SHARE
   AND THE TAX BASE TARGETING
-------------------------------------------------------- Appendix II:2

Given the relationship between state aid and local district tax bases
in equation II.1, the following formulas show that the minimum
foundation level and the minimum common tax effort depend on the
state average per pupil funding level, the state share of total
funding, and the tax base targeting elasticity of state aid:

   Equation II.3

   (See figure in printed
   edition.)

where

e* = minimum foundation amount per pupil

1- = state share of total funding

g.v = tax base targeting elasticity, that is, the elasticity
of state grant per pupil to district income per pupil

= state average per pupil funding level

t* = minimum common tax effort required of districts for financing
the foundation amount per pupil

 = equalization parameter

= average tax effort of all districts.

As the first formula in equation II.3 shows, the minimum foundation
level that a state supports (e\* ) is directly proportional to a
state's average per pupil funding level (), the state share of total
funding (1-), and the tax base targeting elasticity of state
aid expressed as (1+g.v).  Therefore, the policy decisions
states make regarding these two key parameters--state share of
funding and tax base targeting--directly affect the amount of funding
that states can support as a minimum foundation level in districts.

To help illustrate the relationship between the two key policy
parameters and the minimum foundation level a state could support, we
have compared two possible tax base targeting scenarios.  Under the
first scenario, we assume states provide equal per pupil grants to
all districts adjusted for student needs and teacher costs.  This
implies a tax base targeting elasticity (g.v) of 0 and,
according to equation II.3, the foundation funding level would simply
be the state share of the state's average per pupil funding level
(e\* =(1-)).

Under the second scenario, we assumed states would provide the tax
base targeting necessary to guarantee all districts the ability to
fund the state average per pupil funding level with the same tax
effort.  According to the first part of equation II.3, if the
foundation funding level is to equal the state average (e\* =), then
it follows that (1-)(1+g.v)=1.  Solving for the
required tax base targeting elasticity (g.v) reveals that
the required amount of tax base targeting depends on the division of
funding between the state and its local school districts as follows:
g.v = -/(1-).

      STATE EQUALIZATION EFFORT
------------------------------------------------------ Appendix II:2.1

The state average per pupil funding level represents the maximum
foundation level a state could support given the total amount of
state and local funding available for education in the state because
providing all districts with an above average funding level would be
impossible.  Consequently, expressing the foundation level as a
percentage of the state average provides a natural benchmark against
which to measure a state's effort to equalize its per pupil funding.
Given these considerations, we have defined a state's equalization
effort as the portion of a state's average per pupil funding that a
state implicitly supports as a (minimum) foundation level.\53
Dividing equation II.3 by the state average funding level yields the
following formula for a state's equalization effort:

   Equation II.4

   (See figure in printed
   edition.)

Equation II.4 shows that a state's equalization effort equals its
funding share (1-) adjusted by its tax base targeting effort
(1+g.v).  For example, some states distribute aid on an
equal per pupil funding basis, that is, the state does not target
additional funds on the basis of districts' tax bases.  Because the
tax base elasticity (g.v) of state aid would be 0 under
these circumstances, the state's equalization effort would be equal
to the state share of total funding (1-).  In this case,
with no tax base targeting, a state's equalization effort depends
completely on its state share measured as the proportion of total
(state and local) education funding the state provides.  For example,
assuming no tax base targeting, a state that financed half of all
school funding would have an equalization effort of 50 percent, and a
state that financed 70 percent of total funding at the state level
would have an equalization effort of 70 percent.

--------------------
\53 We refer to this foundation level as "implicit" because it
derives from information on the state's share of total funding and
the tax base targeting elasticity that we estimated on the basis of
the distribution of state aid.

   CALCULATING STATES' TAX BASE
   TARGETING EFFORTS
-------------------------------------------------------- Appendix II:3

Our measure of a state's effort to target additional funding to poor
districts is the tax base elasticity of state aid, shown in equation
II.2.  We estimated this elasticity using equation II.1 with
additional variables included to control for economies of scale and
student needs.  We adjusted both the dependent and independent
variables for differences in geographic cost within each state and
then put the variables into index form.\54 We used district income
per pupil as a proxy for a district's ability to pay for education
from local resources, rather than property wealth per pupil.
Property wealth is the measure states most commonly use to determine
a district's aid allocation.  We used district income because we
could not construct a property wealth per pupil measure from the
national district-level databases available.  In addition, beyond the
school finance field, income--as opposed to wealth--is the most
commonly accepted measure of the ability to raise revenue.  The main
limitation of the income component of our national analysis is its
exclusion of commercial or nonresidential income, which may
understate some districts' ability to raise revenue.

We weighted each observation by district size to better reflect the
distribution of state funding to students rather than districts.  We
also adjusted for differences in resource costs by district, using a
national district-level teacher cost index recently developed for the
National Center for Education Statistics (NCES).  This index was
intended to measure differences in personnel-related costs.  We did
not apply the teacher cost adjustment to all district revenue,
however.  We applied the adjustment to 84.8 percent of current
revenue estimated to relate to personnel costs, including salaries,
fringe benefits, and some purchased services, because the remaining
costs, such as books, materials, and supplies, tend not to vary as
personnel costs do within a state.\55 \56

--------------------
\54 To derive the index form of each variable, we measured all
variables as district rates and then divided the district rate by its
corresponding state average.

\55 See Jay Chambers and William Fowler, Jr., Public School Teacher
Cost Differences Across the United States, Department of Education,
NCES, Analysis/Methodology Report, No.  95-758 (Washington, D.C.:
Oct.  1995) and Stephen M.  Barro, Cost of Education Differentials
Across the States, Department of Education, NCES Working Paper No.
94-05 (Washington D.C.:  July 1994).  In using the 84.8 percent
estimate, we assumed that all personnel costs, including noncertified
personnel costs, have patterns of cost variation similar to certified
personnel.

\56 See GAO/HEHS-97-31, Feb.  5, 1997.

   STATE EQUALIZATION EFFORTS, TAX
   BASE TARGETING, AND FUNDING
   SHARES
-------------------------------------------------------- Appendix II:4

Table II.1 provides state funding shares, tax base targeting
elasticities, and equalization efforts, which we originally presented
in another report and used for the analysis in chapter 2 of this
report.

                         Table II.1

               State Funding Shares, Tax Base
            Targeting, and Equalization Efforts,
                    School Year 1991-92

                   State share         State         State
                      of total     targeting  equalization
                     funding\a      effort\b      effort\c
State                (percent)     (percent)     (percent)
----------------  ------------  ------------  ------------
Alabama                   69.8             0          69.8
Alaska                    76.4             0          76.4
Arizona                   46.8          23.2          57.7
Arkansas                  65.4          32.8          86.9
California                68.9          11.9          77.1
Colorado                  43.5          75.3          76.2
Connecticut               38.8          43.0          55.4
Delaware                  70.2           7.0          75.1
Florida                   53.0          61.5          85.7
Georgia                   54.6          24.2          67.8
Idaho                     67.1          13.0          75.7
Illinois                  33.2          23.0          40.9
Indiana                   54.1           9.0          59.5
Iowa                      49.0          10.4          54.1
Kansas                    43.8          24.1          54.4
Kentucky                  70.0          23.9          86.7
Louisiana                 62.2             0          62.2
Maine                     49.4          28.7          63.6
Maryland                  40.4          56.6          63.2
Massachusetts             30.8          31.6          40.6
Michigan                  32.9          47.5          48.5
Minnesota                 53.5          49.9          80.1
Mississippi               64.4           2.0          65.7
Missouri                  44.6           1.7          45.4
Montana                   44.2          12.6          49.8
Nebraska                  34.3          24.6          42.8
Nevada                    56.9         100.7         100.0
New Hampshire              8.3          57.1          13.1
New Jersey                43.1          10.4          47.6
New Mexico                85.0             0          85.0
New York                  42.6          57.8          67.3
North Carolina            67.7           1.6          68.8
North Dakota              48.0             0          48.0
Ohio                      41.9          18.0          49.4
Oklahoma                  71.1          10.2          78.3
Oregon                    31.1           4.3          32.5
Pennsylvania              43.0          25.5          53.9
Rhode Island              39.3          69.4          66.6
South Carolina            52.4          50.5          78.8
South Dakota              29.5             0          29.5
Tennessee                 47.0             0          47.0
Texas                     47.4          52.2          72.1
Utah                      60.2          17.2          70.5
Vermont                   29.0          53.9          44.7
Virginia                  36.0          49.9          53.9
Washington                75.2           0.9          75.9
West Virginia             72.5          12.7          81.8
Wisconsin                 46.2            27          58.6
Wyoming                   52.5             0          52.5
----------------------------------------------------------
\a The state share of total (state and local) funding expressed as a
percentage.

\b State targeting is measured by the income elasticity of state
funding, where district income represents the tax base per pupil.
The income elasticity is the percentage difference in state funding
resulting from a 1-percent change in district income.  Because both
independent and dependent variables are measured relative to their
respective state averages, they represent percentage differences from
the state averages.  In this report, we multiplied the elasticity by
100 to measure the change in state funding from the state average
funding level associated with a 100-percent change in tax base wealth
from the state average tax base wealth.  In calculating this score,
we made adjustments for statewide differences in geographic and
student need-related costs.  A targeting effort of 23.2 percent, for
example, means that a 100-percent increase in district income is
associated with a 23.2-percent decline in state funding, where both
changes are measured relative to their state average.  An elasticity
of 0 signifies no tax base targeting.  All states' targeting efforts
were constrained to be less than or equal to 0 because if the
targeting effort score was positive, implying that wealthy districts
received more state aid than poorer districts, we assert that these
states did not target state funding to poorer districts.

\c The equalization effort measures the proportion of the states'
average funding level that state policies allow districts to finance
with an equal tax effort.

   MEASURING OF INCOME-RELATED
   FUNDING GAPS
-------------------------------------------------------- Appendix II:5

To measure the size of the income-related funding gaps between
districts, we calculated a fiscal neutrality score using the
following regression model:

   Equation II.5

   (See figure in printed
   edition.)

where

ei = a district's total per pupil funding (state plus local)

= state average per pupil funding

ci = a district's teacher cost index

ni = a district's student need index\57

vi = a district's income per pupil

= average income per pupil of all districts

i = random error term.

Because both the dependent and independent variables are measured
relative to their respective state average values, the slope
coefficient (1) can be interpreted as the tax base (income)
elasticity of total funding--a state's fiscal neutrality score.  A
fiscal neutrality score of 0 indicates that, on average, per pupil
funding is the same in wealthy as in poor districts and that no
income-related funding gap exists.  A positive fiscal neutrality
score indicates that per pupil funding rises with local income,
resulting in a funding gap.  The larger the neutrality score, the
larger the funding gap.

We used the above model to estimate fiscal neutrality scores for
school year 1991-92 in another report.\58 (App.  III of that report
details the data and regression results.) Table II.2 shows the fiscal
neutrality scores for each state.

                               Table II.2

                 State Fiscal Neutrality Scores, School
                              Year 1991-92

                                                                Fiscal
                                                                neutra
                                                                  lity
                                                                score\
State                                                                a
--------------------------------------------------------------  ------
Alabama                                                          +.290
Alaska                                                           -.272
Arizona                                                          +.141
Arkansas                                                         +.220
California                                                       +.073
Colorado                                                         +.154
Connecticut                                                      +.241
Delaware\b                                                       +.072
Florida                                                          +.239
Georgia                                                          +.323
Idaho                                                            +.247
Illinois                                                         +.338
Indiana                                                          +.153
Iowa\b                                                           +.031
Kansas\b                                                         +.014
Kentucky                                                         +.126
Louisiana                                                        +.216
Maine                                                            +.176
Maryland                                                         +.469
Massachusetts                                                    +.447
Michigan                                                         +.290
Minnesota                                                        +.113
Mississippi\b                                                    +.007
Missouri                                                         +.362
Montana                                                          +.393
Nebraska                                                         +.154
Nevada                                                           -.556
New Hampshire                                                    +.238
New Jersey                                                       +.168
New Mexico\b                                                      .004
New York                                                         +.370
North Carolina                                                   +.250
North Dakota                                                     +.236
Ohio                                                             +.315
Oklahoma                                                         -.053
Oregon                                                           +.166
Pennsylvania                                                     +.300
Rhode Island                                                     +.274
South Carolina                                                   +.150
South Dakota                                                     +.367
Tennessee                                                        +.242
Texas\b                                                          +.003
Utah\b                                                           +.036
Vermont                                                          +.176
Virginia                                                         +.377
Washington                                                       +.055
West Virginia\b                                                  +.071
Wisconsin                                                        +.129
Wyoming\b                                                        -.196
----------------------------------------------------------------------
\a The fiscal neutrality score is a state's elasticity of total
funding per weighted pupil relative to income per weighted pupil.  A
fiscal neutrality score of 0 indicates that, on average, per pupil
funding is the same in wealthy as in poor districts and that no
income-related funding gap exists.  A positive fiscal neutrality
score indicates that per pupil funding rises with local income,
resulting in a funding gap.  The larger the neutrality score, the
larger the funding gap.

\b Fiscal neutrality score is not statistically different from 0.

--------------------
\57 See app.  II in GAO/HEHS-97-31 for more explanation of these
variables.

\58 GAO/HEHS-97-31, Feb.  5, 1997.

DATA AND METHODS USED FOR THE CASE
STUDY STATES
========================================================= Appendix III

To determine the effects of changes in state equalization policies on
funding gaps in our case study analysis, we used the same conceptual
model to analyze state equalization efforts and funding gaps as we
used in our broader national analysis reported in chapters 2 and 4.
We used state-reported data, however, to calculate the key variables
used in the analysis.  This appendix describes how the tax base data
we obtained from the states differ from the tax base data used in the
national analysis and reports our estimates of the state share of
total funding, state tax base targeting elasticities, and fiscal
neutrality scores for school years 1991-92 and 1995-96.  For
comparison purposes, we also have provided these estimates as
prepared for each state in a prior report,\59 in which we used
resident income per pupil as the tax base measure.

--------------------
\59 School Finance:  State Efforts to Reduce Funding Gaps Between
Poor and Wealthy Districts (GAO/HEHS-97-31, Feb.  5, 1997).

   DATA SOURCES
------------------------------------------------------- Appendix III:1

Unlike our national analysis of funding gaps in school year 1991-92,
which uses income per pupil as a proxy for district tax base wealth,
our analysis of the four case study states uses each state's
principal tax base measure to determine local revenue allocations for
education in school years 1991-92 and 1995-96.  We used this measure
because we wanted to estimate each district's ability to raise
revenue for education given existing state laws governing such
efforts.  Doing so yields tax base targeting elasticities based on
each state's own concept of local tax wealth.

The tax base variable we used for Oregon was 100 percent of a
district's market value of property.  For Kansas, we used a
district's assessed property value, which is a fraction of current
market property values based on a constitutionally required property
classification scheme.  For Louisiana, we used the state's
representative tax system, which combines property wealth and sales
tax revenue to determine a district's tax capacity, for the tax base
variable.  Sales tax revenue represents the primary local source of
education revenue in Louisiana.  Finally, for Rhode Island, we used
district equalized weighted assessed valuation (EWAV) for the tax
base variable.  EWAV represents assessed property value per pupil
adjusted for differences in assessment practices among districts.
Although the state further adjusts EWAV by each school district's
median income, we used EWAV alone--without further adjustments--as
the tax base of Rhode Island districts.

   EQUITY MEASURES
------------------------------------------------------- Appendix III:2

To analyze the effects of funding changes in the four case study
states, we used the same minimum foundation equalization model used
in the national analysis of funding gaps.  We calculated the
following measures for each of the four states for school years
1991-92 and 1995-96:  state share of total funding, targeting effort,
equalization effort, relative local tax effort, and funding gaps.  We
then measured the change in each variable between school years
1991-92 and 1995-96.

Tables III.1 and III.2 summarize the educational funding equity
measures for the four case study states--Oregon, Kansas, Rhode
Island, and Louisiana.  These include measures of each state's
equalization policies (state share of funding and state targeting
effort), state equalization effort, tax effort of the poorest group
of districts compared with the wealthiest group of districts, and the
funding gap between poor and wealthy districts as measured by the
fiscal neutrality score for school years 1991-92 and 1995-96.  For
comparison purposes, we have also provided these estimates as
prepared for each state in a prior report (see footnote 59) in which
we use resident income per pupil as the tax base measure.  See table
III.3.

                                       Table III.1

                          Summary of Educational Funding Equity
                              Measures, School Year 1991-92

                                                                Poorest
                                                         districts' tax       Funding gap
                    State         State         State   effort compared  between poor and
                 share of     targeting  equalization   with wealthiest           wealthy
                funding\a      effort\b      effort\c      districts'\d       districts\e
State           (percent)     (percent)     (percent)         (percent)         (percent)
-------------  ----------  ------------  ------------  ----------------  ----------------
Oregon                 33            22            41               154                23
Kansas                 42            11            47               181                10
Rhode Island           40            23            49               114                19
Louisiana              62             0            62               138                24
-----------------------------------------------------------------------------------------
\a State share of funding is the proportion of total funding (state
and local combined) that is funded by the state.

\b The state targeting effort is the elasticity of state funding per
weighted pupil to district wealth per weighted pupil.  In calculating
this score, we adjusted for within-state differences in geographic
and student need-related costs.  A state targeting effort of 22
percent, for example, means that a district whose wealth is 100
percent greater than the state average would be expected to sustain a
decline in state funding equal to 22 percent below the state average.

\c The state equalization effort measures the proportion of the
average funding level in the state that state policies--state share
of total funding (state and local combined) and targeting effort--
allow districts to finance with an equal tax effort.

\d Poorest districts' tax effort compared with wealthiest districts'
is a ratio of the local tax effort in a state's poorest districts to
its wealthiest districts expressed as a percent.  For both poorest
and wealthiest districts, local tax effort is the total amount of
local revenue raised by all districts within the group for every
$1,000 of district wealth.

\e The funding gap between poor and wealthy districts as measured by
the fiscal neutrality score is the elasticity of total (state and
local funding) funding to the district tax base.  The fiscal
neutrality score measures the extent to which education funding
depends on district wealth.  An elasticity of 0 implies that no
funding gap exists (fiscal neutrality has been achieved) because no
systematic differences exist in per pupil funding between wealthy and
poor districts.  A positive elasticity implies that total funding per
weighted pupil is higher in wealthy districts than in poor districts.
A funding gap of 23 percent, for example, means that a 100-percent
increase in district wealth is associated with a total funding
increase of 23 percent, where both changes are measured relative to
the state average.

                                       Table III.2

                          Summary of Educational Funding Equity
                              Measures, School Year 1995-96

                                                                Poorest
                                                         districts' tax       Funding gap
                    State         State         State   effort compared  between poor and
                 share of     targeting  equalization   with wealthiest           wealthy
                funding\a  effort\b(per      effort\c      districts'\d       districts\e
State           (percent)         cent)     (percent)         (percent)         (percent)
-------------  ----------  ------------  ------------  ----------------  ----------------
Oregon                 59            15            67               147                15
Kansas                 59            35            79               133                 8
Rhode Island           42            21            50                96                20
Louisiana              58            15            67               109                26
-----------------------------------------------------------------------------------------
Note:  See table notes for table III.1.

                                       Table III.3

                          Summary of Educational Funding Equity
                         Measures Using Resident Income per Pupil
                           as the Tax Base Measure, School Year
                                         1991-92

                                                                Poorest
                                                         districts' tax       Funding gap
                    State         State         State   effort compared  between poor and
                 share of     targeting  equalization   with wealthiest           wealthy
                funding\a      effort\b      effort\c      districts'\d       districts\e
State           (percent)     (percent)     (percent)         (percent)         (percent)
-------------  ----------  ------------  ------------  ----------------  ----------------
Oregon                 31            43            33               162                17
Kansas                 44            24            54               124               1\f
Rhode Island           39            69            67                96                27
Louisiana              62             0            62               125                22
-----------------------------------------------------------------------------------------
Note:  See table notes b through e in table III.1.

\a State share of funding is the proportion of total funding (state
and local combined) that is funded by the state as reported in the
CCD for the 1991-92 school year.  Here we defined wealth according to
income rather than property.

\f The score is not statistically different from 0.

METHODOLOGY FOR ESTIMATING STATE
POLICY OPTIONS FOR ELIMINATING
FUNDING GAPS BETWEEN POOR AND
WEALTHY DISTRICTS
========================================================== Appendix IV

This appendix describes the model we developed for analyzing changes
in state equalization policies required to eliminate funding gaps
between poor and wealthy districts.  The model is designed to show
how both the tax efforts of local school districts and state
equalization policies affect the funding gap.

   LOCAL TAX CHOICES AFFECT EQUITY
-------------------------------------------------------- Appendix IV:1

Local school districts provide half of the funds for education, and
therefore local taxing decisions affect student equity.  In addition,
state policy options affect equity for both students and local
taxpayers.\60

--------------------
\60 See Jerry Fastrup, "Taxpayer and Pupil Equity:  Linking Policy
Tools With Policy Goals," Journal of Education Finance, Vol.  23, No.
1 (1997), pp.  69-100, for the equalization model that serves as the
basis for this methodology.

      STUDENT AND LOCAL TAXPAYER
      EQUITY IN THE ABSENCE OF
      STATE ASSISTANCE
------------------------------------------------------ Appendix IV:1.1

In the absence of state funding, schools would be funded exclusively
with local revenues.  Under this assumption, the level of funding
available to a given school district would be the result of applying
the local tax rate to the district's tax base as shown in equation
IV.1:

   Equation IV.1

   (See figure in printed
   edition.)

where

ei = a district's per pupil funding

ti = a district's local tax effort

vi = a district's per pupil tax base.

This equation represents an "accounting identity" because the local
tax rate, also referred to as tax effort, when multiplied by the
district's tax base, yields the tax revenues the districts raise for
educational purposes.  For a given level of tax effort, a higher tax
base generates proportionately more funding.  Consequently, poorer
districts must put forth proportionately greater effort to provide
funding comparable with that of wealthier districts.  Although poorer
districts tend to make a greater tax effort, it is not
proportionately greater.  As a result, per pupil funding tends to
relate to local districts' wealth.\61 One typical goal of state
school finance systems is reducing and perhaps even eliminating the
dependency of per pupil funding on local tax wealth.

A common measure of local funding's dependency on local wealth is the
tax base elasticity of per pupil funding, also referred to as a
fiscal neutrality coefficient.  We chose to use the fiscal neutrality
coefficient as our main indicator of student equity.  Student equity
is realized if the fiscal neutrality coefficient equals 0, signifying
that per pupil funding does not relate to local wealth.  Using the
accounting identity in equation IV.1, we derived the following
expression, which shows the relationship of student equity to
differences in the tax effort of wealthy and poor districts:\62

   Equation IV.2

   (See figure in printed
   edition.)

where

e.v = fiscal neutrality coefficient (that is, the tax base
elasticity of per pupil funding)

t.v = tax base elasticity of local tax effort.

This relationship shows that student equity, as measured by the
fiscal neutrality coefficient (e.v), directly depends on the
relationship between local tax effort and local wealth or tax base as
measured by (t.v).  A positive tax base elasticity of local
tax effort signifies a higher tax effort by wealthy districts, while
a negative elasticity signifies a higher tax effort by poor
districts.

--------------------
\61 If poor districts make the same or a lesser tax effort as wealthy
districts, funding depends even more on local wealth.

\62 This expression can be derived by differentiating equation IV.1,
noting that the tax rate is a function of the tax base.  The
elasticity is by definition (de/dv)(v/e).

   STATE EQUALIZATION POLICIES
   AFFECT EQUITY FOR STUDENTS AND
   LOCAL TAXPAYERS
-------------------------------------------------------- Appendix IV:2

To weaken the dependence of per pupil funding on local wealth, states
typically fund part of districts' educational expenses, with poorer
districts generally receiving more state aid per pupil than wealthy
districts.  Targeting extra funding to poor districts helps to offset
poorer districts' greater tax burden and thus provides greater equity
for local taxpayers because state aid better equalizes the revenue
yield (state and local funds combined) from comparable levels of tax
effort by wealthy and poor districts.

The extra aid poor districts receive from the state, however, only
improves student equity to the extent the districts use it to
increase education funding rather than reduce local taxes.
Consequently, assessing the effectiveness of a state's equalization
effort in reducing funding gaps requires accounting for both local
tax choices and state equalization policies.

Using the model from appendix II, we derived an expression for the
fiscal neutrality coefficient (also referred to as the tax base
elasticity of per pupil funding (e.v)).  (See equation
IV.3.) The fiscal neutrality coefficient can be expressed as a
minimum equalized tax effort expressed as a percentage of the average
effort of all districts in a state:

   Equation IV.3

   (See figure in printed
   edition.)

where t*/ depends on the state share of total funding and an
equalization parameter (see equation II.2 in app.  II).
(Substituting that expression for t*/ with some algebra will yield
equation IV.4.)\63 This shows its relationship to both relative local
tax effort and state equalization policies:

   Equation IV.4

   (See figure in printed
   edition.)

where

e.v = a state's tax base elasticity of per pupil funding

 = the share of total funding financed by local school
districts in a state

t.v = a state's tax base elasticity of local tax effort

(1-) = a state's share of total funding

g.v = a state's tax base targeting effort (that is, the tax
base elasticity of state aid per pupil).

--------------------
\63 Fastrup, "Taxpayer and Pupil Equity:  Linking Policy Tools With
Policy Goals," Journal of Education Finance, pp.  69-100.

      LOCAL TAX POLICY CHOICES
      DETERMINE EFFECT OF STATE
      EQUALIZATION POLICIES ON
      STUDENT EQUITY
------------------------------------------------------ Appendix IV:2.1

Equation IV.4 shows that student equity depends on a state's
equalization policies (the state share of total funding (1-)
and the tax base elasticity of state aid (g.v)).  In
addition, it shows that differences in the tax effort of wealthy and
poor districts affect student equity through the tax base elasticity
of local tax effort (t.v).  State funding policy dampens the
effect of the tax base elasticity of local tax effort, however,
because the elasticity is now multiplied by the local share of total
funding .  The smaller the local share, the smaller the
effect of differences in local tax effort.

The local tax effort elasticity summarizes the relationship between
local wealth and local tax effort that would prevail given a state's
equalization policy.  In the absence of state aid, the tax base
elasticity of local tax effort (t.v) represented in equation
IV.2 summarizes local districts' tax policy choices.  With state aid,
this elasticity reflects local district tax efforts after
implementation of a state's equalization policy.  It therefore
reflects all changes in local districts' tax behavior made in
response to a state's equalization policy.\64

Because increases in a state's equalization effort will increase
state funding for poor districts more than for wealthy districts, the
likely effect will be a decreased tax effort by poor districts and
possibly an increased effort by wealthy districts.  This in turn will
result in a larger (less negative) tax base elasticity of local tax
efforts.  Consequently, a state's increased equalization effort will
not necessarily mean a reduced fiscal neutrality coefficient if
offsetting changes in local tax behavior increase the tax base
elasticity of local tax effort.  Changes in local tax efforts could,
in principle, neutralize some or all of a state's increased
equalization effort.

To guard against local districts' offsetting increased state funding,
states may also adopt policies that constrain local tax behavior if
states want their equalization policies to have the maximum effect on
closing funding gaps between poor and wealthy districts.\65
Consequently, to use equation IV.3 to calculate changes in state
equalization policies that will close funding gaps, we assumed that
the tax base elasticity of district tax effort remained constant at a
certain level when the state increased its equalization effort.

We developed two policy scenarios regarding the effect of increased
state equalization effort on funding gaps; each scenario assumed a
different, yet constant, tax base elasticity of district tax effort.
The first scenario assumed the state placed constraints on local tax
efforts so that the tax base elasticity of local tax effort remained
the same as it was in school year 1991-92.  To achieve this result,
the state could mandate that all local districts either continue with
the same tax rates they had in effect in that year or change their
tax rates by the same proportion to maintain the same elasticity.
This scenario would prevent poor districts with higher tax burdens
from lowering their rates more than wealthy districts, ensuring that
the additional state aid the poor districts received would yield more
total funding per pupil relative to wealthy districts.

The second scenario assumed that the state required a statewide
uniform tax effort from all districts and targeted state funding to
guarantee all districts the same statewide per pupil funding amount.
This scenario would guarantee both student equity (all districts
would receive the same funding per weighted pupil) and equity for
local district taxpayers (districts would receive the same amount of
total funding per weighted pupil for the mandated tax effort).

--------------------
\64 Before implementation, we would expect poorer districts to adopt
higher tax rates than wealthier districts to help make up for their
more limited tax bases.  With the implementation of state aid, we
would expect poor districts to use part of the aid they receive to
reduce local tax rates and only part to increase education spending.
This implies that the tax base elasticity of local tax effort would
increase (become less negative) as a state increases its equalization
effort.

\65 Two of the case study states provide evidence of offsetting
changes in local tax behavior.  Neither Rhode Island nor Louisiana
restricted local tax choices, and in both states the gaps in local
tax effort between wealthy and poor districts closed so much that
each state's increased equalization effort failed to close the
funding gaps between wealthy and poor districts (see tables 3.4, 3.5,
and 3.6 in ch.  3).

   DETERMINING STATE SHARE AND
   TARGETING ASSUMING NO CHANGE IN
   SCHOOL YEAR 1991-92 RELATIVE
   LOCAL TAX EFFORTS
-------------------------------------------------------- Appendix IV:3

For this analysis, we calculated how 36 states could have changed
their state equalization policies to eliminate their funding gaps,
assuming that districts maintained their school year 1991-92 tax
efforts.  We selected these 36 states because their total funding
favored wealthy districts in the 1991-92 school year.  Specifically,
each state met the following two criteria:  (1) the state's school
year 1991-92 fiscal neutrality score was positive, indicating that
total funding increased as district income increased,\66 and (2) the
state's school year 1991-92 tax base elasticity of tax effort was
greater than -1.0.\67 In 11 of these 36 states, wealthier districts
made greater tax efforts than poorer districts, contributing to
larger funding gaps.  In the remaining 25 states, poorer districts
made a greater tax effort; however, funding gaps persisted due to
poorer districts' smaller tax bases even with their greater
effort.\68

To conduct the analysis, we first determined the state share of
education funding that would have eliminated the gap given the
state's school year 1991-92 tax base targeting effort.  Next, we
determined the tax base targeting effort that would eliminate the
funding gap, given the state's share of funding in school year
1991-92.  Our analyses resulted in the minimum share of funding and
the minimum targeting effort each state would have to achieve to
eliminate the funding gap given the relative local tax effort of
districts in school year 1991-92.

--------------------
\66 We did not estimate the policy changes needed to close funding
gaps in the 12 states that did not have a statistically significant
fiscal neutrality score (Delaware, Iowa, Kansas, Mississippi, New
Mexico, Texas, Utah, West Virginia, and Wyoming) or had negative
scores (Alaska, Nevada, and Oklahoma), which indicated that funding
already favored the poorer districts.

\67 When a state's tax base elasticity of local tax effort is less
than or equal to -1.0, the tax effort by poor districts is so high
compared with wealthy districts that this effort alone could
eliminate funding gaps even if the state had provided no state
funding at all.  Using this criterion eliminated another state,
California, from this analysis.

\68 If school year 1991-92 state targeting efforts (g.v)
were positive, implying wealthy districts received more state aid
than poorer districts, we constrained the value of this variable to
0, asserting that these states do not target state funding to poorer
districts.

      CALCULATING STATE SHARE
------------------------------------------------------ Appendix IV:3.1

To determine the state share of funding in school year 1991-92 needed
to close funding gaps if the differences in the tax efforts of
wealthy and poor districts were constrained to their school year
1991-92 levels, we set the expression for fiscal neutrality (equation
IV.4) equal to 0 and solved for the required state funding share to
obtain equation IV.5:

   Equation IV.5

   (See figure in printed
   edition.)

Next, we calculated the state share of funding given school year
1991-92 values for the tax base elasticities of local tax effort
(t.v) and state aid (g.v).  Table IV.1 shows the
results of our computations.

                                        Table IV.1

                         State Funding Share Needed to Close the
                           Funding Gap in School Year 1991-92,
                          Assuming States Constrained Local Tax
                          Effort to 1991-92 Levels With 1991-92
                               Tax Base Targeting Policies

                                            1991-92 state     State share
                                                 share of       needed to    Actual share
                                  1991-92       education       close the            as a
                           relative local       funding\b           gap\c   percentage of
State                        tax effort\a       (percent)       (percent)  required share
-------------------------  --------------  --------------  --------------  --------------
U.S. median                         -.235              48              71              67
Alabama\d                            .027              70             100              70
Alaska\d                            -.808              76            76\c             100
Arizona                             -.468              47              70              67
Arkansas                            -.243              65              70              94
California                         -1.028              69            69\c             100
Colorado                            -.381              44              45              96
Connecticut                         -.066              39              68              57
Delaware                            -.235              70            70\c             100
Florida                              .234              53              67              79
Georgia                              .007              55              81              68
Idaho                                .011              67              89              76
Illinois                            -.179              33              78              43
Indiana                             -.511              54              83              65
Iowa                                -.772              49            49\c             100
Kansas                              -.448              44            44\c             100
Kentucky                             .274              70              84              83
Louisiana\d                         -.237              62             100              62
Maine                               -.172              49              74              67
Maryland                             .164              40              67              60
Massachusetts                        .077              31              77              40
Michigan                            -.031              33              67              49
Minnesota                           -.104              54              64              83
Mississippi                         -.267              64            64\c             100
Missouri                            -.018              45              98              45
Montana                             -.469              44              81              55
Nebraska                            -.430              34              70              49
Nevada                             -1.252              57            57\c             100
New Hampshire                       -.370               8              52              16
New Jersey                          -.203              43              88              49
New Mexico                         -1.776              85            85\c             100
New York                             .076              43              65              66
North Carolina                       .052              68              99              69
North Dakota                        -.451              48             100              48
Ohio                                -.276              42              80              52
Oklahoma                            -.473              71            71\c             100
Oregon                              -.393              31              93              33
Pennsylvania                        -.023              43              79              54
Rhode Island                         .045              39              60              65
South Carolina                      -.194              52              61              85
South Dakota\d                      -.164              30             100              30
Tennessee\d                         -.709              47             100              47
Texas                               -.234              47            47\c             100
Utah                                -.734              60            60\c             100
Vermont                             -.333              29              55              53
Virginia                             .096              36              69              52
Washington                          -.277              75              99              76
West Virginia                       -.230              75            75\c             100
Wisconsin                           -.160              46              76              61
Wyoming                            -1.645              53            53\c             100
-----------------------------------------------------------------------------------------
\a To measure a state's relative local tax effort, we estimated the
income elasticity of local tax effort.  For each state, this
elasticity measures the percentage change in local tax effort
associated with a 1-percent increase in district income per weighted
pupil.  As measured this way, the greater the elasticity, the greater
the tax effort in wealthy districts compared with poor districts.

\b State share of education funding is the percentage of total (state
and local) education funds that are state funds.

\c These states had already closed the funding gap or had funding
that favored poor over wealthy districts or had a tax base elasticity
of tax effort less than or equal to -1.0.  Therefore, no change in
their state share was necessary.

\d In calculating the state share of education funding required to
close the funding gap, we constrained the tax base targeting effort
in these states to 0.

      CALCULATING TAX BASE
      TARGETING
------------------------------------------------------ Appendix IV:3.2

Assuming that states' tax base elasticities of tax effort were
constrained to their school year 1991-92 levels, we determined how
much states would have to increase their targeting effort to poorer
districts--rather than increase the state share of total funding--to
close funding gaps.  To determine the state targeting effort needed
to close the funding gap, we set the fiscal neutrality score in
equation IV.4 equal to 0 and assumed states prevented districts from
changing local tax efforts and solved for the tax base targeting
policy that would eliminate local funding gaps:

   Equation IV.6

   (See figure in printed
   edition.)

Next, we calculated the state tax base targeting elasticity given
values for a state's school year 1991-92 local share of total funding
() and tax base elasticity of local tax effort
(t.v).  Table IV.2 shows the results of our computations.

                               Table IV.2

                 State Tax Base Targeting Effort Needed
                to Close the Funding Gap in School Year
                  1991-92 Assuming States Constrained
                Local Tax Efforts to 1991-92 Levels With
                      1991-92 State Funding Shares

                                            Tax base
                                           targeting
                            1991-92 tax      effort
                1991-92         base      required to
                relative     targeting     close the     Actual as a
               local tax      effort\b       gap\c      percentage of
State           effort\a     (percent)     (percent)       required
------------  ------------  ------------  ------------  --------------
U.S. median      -.235           23            73             33
Alabama\d         .027           0             44             0
Alaska\d         -.808           0            0\c       Not applicable
Arizona          -.468           23            61             38
Arkansas         -.243           33            40             82
California       -1.028          12           12\c           100
Colorado         -.381           75            80             94
Connecticut      -.066           43           148             29
Delaware         -.235           7            7\c            100
Florida           .234           62           109             56
Georgia           .007           24            84             29
Idaho             .011           13            50             26
Illinois         -.179           23           165             14
Indiana          -.511           10            41             24
Iowa             -.772           10           10\c           100
Kansas           -.448           24           24\c           100
Kentucky          .274           24            55             44
Louisiana\d      -.237           0             46             0
Maine            -.172           29            85             34
Maryland          .164           57           172             33
Massachusett      .077           32           242             13
 s
Michigan         -.031           48           198             24
Minnesota        -.104           50            78             64
Mississippi      -.267           2            2\c            100
Missouri         -.018           2            122             1
Montana          -.469           13            67             19
Nebraska         -.430           25           109             23
Nevada           -1.252         101          101\c           100
New              -.370           57           695             8
 Hampshire
New Jersey       -.203           10           105             10
New Mexico       -1.776          0            0\c       Not applicable
New York          .076           58           145             40
North             .052           2             50             3
 Carolina
North            -.451           0             60             0
 Dakota\d
Ohio             -.276           18           101             18
Oklahoma         -.473           10           10\c           100
Oregon           -.393           4            134             3
Pennsylvania     -.023           25           130             20
Rhode Island      .045           69           162             43
South            -.194           51            73             69
 Carolina
South            -.164           0            200             0
 Dakota\d
Tennessee\d      -.709           0             33             0
Texas            -.234           52           52\c           100
Utah             -.734           17           17\c           100
Vermont          -.333           54           163             33
Virginia          .096           50           195             26
Washington       -.277           1             24             4
West             -.230           13           13\c           100
 Virginia
Wisconsin        -.160           27            98             28
Wyoming          -1.645          0            0\c       Not applicable
----------------------------------------------------------------------
\a To measure a state's relative local tax effort, we estimated the
income elasticity of local tax effort.  For each state, this
elasticity measures the percentage change in local tax effort
associated with a 1-percent increase in district income per weighted
pupil.  As measured this way, the greater the elasticity, the greater
the tax effort in wealthy districts compared with poor districts.

\b The tax base targeting effort is the income elasticity of state
funding per weighted pupil to district income per weighted pupil.  A
targeting effort of 23 percent, for example, means that a doubling in
district income is associated with a 23-percent decrease in state
funding, where both changes are measured relative to their state
average.

\c These states had already closed the funding gap or had funding
that favored poor over wealthy districts or had a tax base elasticity
of tax effort less than or equal to -1.0.  Therefore, no change in
their targeting effort was necessary.

\d The tax base targeting effort for these states was constrained to
0.

   DETERMINING STATE SHARE AND
   TARGETING REQUIRED TO ELIMINATE
   THE FUNDING GAP WHEN DISTRICTS
   MAKE THE SAME LOCAL EFFORT
-------------------------------------------------------- Appendix IV:4

This scenario calculated how states could have used state
equalization policies to eliminate their funding gaps, assuming that
poor and wealthy districts made the same local tax effort.  In this
analysis, we found that all 49 states would need to change their
equalization policies to eliminate the funding gap and allow for an
equal local tax burden.  First, we determined the state share of
education funding that would eliminate the gap given the state's
school year 1991-92 tax base targeting effort.  Next, we determined
the tax base targeting effort that would eliminate the funding gap
given the state's share of funding in school year 1991-92.  Our
analyses resulted in the minimum share of funding and the minimum
targeting effort each state would have to achieve to eliminate the
funding gap given that all districts were making the same local tax
effort.

      CALCULATING STATE SHARE
------------------------------------------------------ Appendix IV:4.1

To determine the state share of funding needed to close the funding
gap with an equal tax effort from local districts, we set the fiscal
neutrality score and the tax base elasticity of local tax effort in
equation IV.4 equal to 0 and solved for the state share.  This
yielded the following relationship between the state share
(1-) and the tax base targeting elasticity of state aid
(g.v):

   Equation IV.7

   (See figure in printed
   edition.)

The state shares that would close funding gaps with the tax base
targeting policies in effect in school year 1991-92 appear in table
IV.3.

                         Table IV.3

          State Funding Share Needed to Close the
          Funding Gaps in School Year 1991-92 and
          Equalize Local Tax Burdens With 1991-92
                Tax Base Targeting Policies

                                         State
                           1991-92       share
               1991-92       state   needed to   Actual as
              tax base    share of       close           a
             targeting   education     funding  percentage
              effort\a   funding\b         gap          of
State        (percent)   (percent)   (percent)    required
----------  ----------  ----------  ----------  ----------
U.S.                23          48          81          63
 median
Alabama\c            0          70         100          70
Alaska\c             0          76         100          76
Arizona             23          47          81          58
Arkansas            33          65          75          87
California          12          69          89          77
Colorado            75          44          57          76
Connecticu          43          39          70          55
 t
Delaware             7          70          93          75
Florida             62          53          62          86
Georgia             24          55          81          68
Idaho               13          67          89          76
Illinois            23          33          81          41
Indiana             10          54          91          59
Iowa                10          49          91          53
Kansas              24          44          81          54
Kentucky            24          70          81          87
Louisiana\           0          62         100          62
 c
Maine               29          49          78          64
Maryland            57          40          64          63
Massachuse          32          31          76          41
 tts
Michigan            47          33          68          49
Minnesota           50          54          67          80
Mississipp           2          64          98          66
 i
Missouri             2          45          98          45
Montana             13          44          89          50
Nebraska            25          34          80          43
Nevada             101          57          50         114
New                 57           8          64          12
 Hampshire
New Jersey          10          43          91          47
New                  0          85         100          85
 Mexico\c
New York            58          43          63          68
North                2          68          98          69
 Carolina
North                0          48         100          48
 Dakota\c
Ohio                18          42          85          49
Oklahoma            10          71          91          78
Oregon               4          31          96          32
Pennsylvan          25          43          80          54
 ia
Rhode               69          39          59          67
 Island
South               50          52          66          79
 Carolina
South                0          30         100          30
 Dakota\c
Tennessee\           0          47         100          47
 c
Texas               52          47          66          72
Utah                17          60          85          71
Vermont             54          29          65          45
Virginia            50          36          67          54
Washington           1          75          99          76
West                13          73          89          82
 Virginia
Wisconsin           27          46          79          59
Wyoming\c            0          53         100          53
----------------------------------------------------------
\a The tax base targeting effort is the income elasticity of state
funding per weighted pupil to district income per weighted pupil.  A
targeting effort of 23 percent, for example, means that a doubling in
district income is associated with a 23-percent decrease in state
funding, where both changes are measured relative to their state
average.

\b State share of education funding is the percentage of total (state
and local) education funds that are state funds.

\c The tax base targeting effort for these states was constrained to
0.

      CALCULATIONS FOR TARGETING
      EFFORT
------------------------------------------------------ Appendix IV:4.2

Assuming that all districts are making the same local tax effort, we
determined the tax base targeting effort needed to close the funding
gaps given the states' share of total funding in school year 1991-92.
Solving equation IV.4 for the tax base elasticity of state aid
yielded the tax base targeting effort (g.v) that would
eliminate funding gaps with equal tax burdens in poor and wealthy
districts given the state share of total funding:

   Equation IV.8

   (See figure in printed
   edition.)

Table IV.4 shows the required tax base targeting elasticity using
school year 1991-92 state funding shares.

                         Table IV.4

           State Tax Base Targeting Effort Needed
          to Close the Funding Gap in 1991-92 and
          Equalize Local Tax Burdens With 1991-92
                    State Funding Shares

                                      Tax base
               1991-92               targeting
                 state     1991-92   needed to   Actual as
              share of    tax base       close           a
             education   targeting     funding  percentage
             funding\a    effort\b         gap          of
State        (percent)   (percent)   (percent)    required
----------  ----------  ----------  ----------  ----------
U.S.                48          23         108          19
 median
Alabama\c           70           0          43           0
Alaska\c            76           0          31           0
Arizona             47          23         114          20
Arkansas            65          33          53          62
California          69          12          45          26
Colorado            44          75         130          58
Connecticu          39          43         158          27
 t
Delaware            70           7          42          17
Florida             53          62          89          69
Georgia             55          24          83          29
Idaho               67          13          49          26
Illinois            33          23         201          11
Indiana             54          10          85          12
Iowa                49          10         104          10
Kansas              44          24         128          19
Kentucky            70          24          43          56
Louisiana\          62           0          61           0
 c
Maine               49          29         102          28
Maryland            40          57         148          38
Massachuse          31          32         224          14
 tts
Michigan            33          47         204          23
Minnesota           54          50          87          57
Mississipp          64           2          55           4
 i
Missouri            45           2         124           1
Montana             44          13         126          10
Nebraska            34          25         191          13
Nevada              57         101          76         133
New                  8          57        1103           5
 Hampshire
New Jersey          43          10         132           8
New                 85           0          18           0
 Mexico\c
New York            43          58         135          43
North               68           2          48           3
 Carolina
North               48           0         108           0
 Dakota\c
Ohio                42          18         139          13
Oklahoma            71          10          41          25
Oregon              31           4         221           2
Pennsylvan          43          25         133          19
 ia
Rhode               39          69         155          45
 Island
South               52          50          91          55
 Carolina
South               30           0         239           0
 Dakota\c
Tennessee\          47           0         113           0
 c
Texas               47          52         111          47
Utah                60          17          66          26
Vermont             29          54         244          22
Virginia            36          50         178          28
Washington          75           1          33           3
West                73          13          38          34
 Virginia
Wisconsin           46          27         117          23
Wyoming\c           53           0          90           0
----------------------------------------------------------
\a State share of education funding is the percentage of total (state
and local) education funds that are state funds.

\b The tax base targeting effort is the income elasticity of state
funding per weighted pupil to district income per weighted pupil.  A
targeting effort of 23 percent, for example, means that a doubling in
district income is associated with a 23-percent decrease in state
funding, where both changes are measured relative to their state
average.

\c The tax base targeting effort for these states was constrained to
0.

   COMBINED STATE SHARE AND
   TARGETING EFFORT REQUIRED TO
   ELIMINATE FUNDING GAPS
-------------------------------------------------------- Appendix IV:5

States can choose to eliminate the funding gap between wealthy and
poor districts by increasing both their state share of education
funding and improving targeting to poorer districts.  In general, the
greater the state share of education funding, the less states have to
target to poorer districts to eliminate the gap.  Likewise, the lower
the state share of education funding, the greater the state's
targeting effort to poor districts must be to eliminate the funding
gap.

We calculated the targeting effort required to eliminate the funding
gap given a range of state share options--from 5 percent of total
education funding to 95 percent of total funding.  We calculated
these options assuming that poor and wealthy districts would make the
same tax effort.  The results represent the maximum equalization
effort any state could achieve.  In reality, states could make less
of an equalization effort, depending on their policy goals.\69

To calculate the targeting effort required to eliminate the funding
gap and ensure that poor and wealthy districts bear the same tax
effort, we used equation IV.7.  In solving this equation, we found
that the targeting effort required to eliminate the funding gap is
the local share of total funding divided by the state share of total
funding:  /1-.  We then generated a range of local
and state funding ratios to derive the targeting effort, as shown in
table IV.5.

                         Table IV.5

          Tax Base Targeting Required to Eliminate
           the Funding Gaps for a Range of State
          Funding Shares When Tax Effort Is Equal
                      Among Districts

State share of
education            Required tax base     Tax base break-
funding\a           targeting effort\b        even point\c
(percent)                    (percent)           (percent)
------------------  ------------------  ------------------
95                                   5               2,000
90                                  11               1,000
85                                  18                 667
80                                  25                 500
75                                  33                 400
70                                  43                 333
65                                  54                 286
60                                  67                 250
55                                  82                 222
50                                 100                 200
45                                 122                 182
40                                 150                 167
35                                 186                 154
30                                 233                 143
25                                 300                 133
20                                 400                 125
15                                 567                 118
10                                 900                 111
5                                1,900                 105
----------------------------------------------------------
\a State share of education funding is the percentage of total (state
and local) education funds that are state funds.

\b The tax base targeting effort is the income elasticity of state
funding per weighted pupil to district income per weighted pupil.  A
targeting effort of 23 percent, for example, means that a doubling in
district income is associated with a 23-percent decrease in state
funding, where both changes are measured relative to their state
average.

\c This is the proportion of the state average district tax base
wealth per pupil at which a district would qualify for no state aid.
Above this cutoff point, to maintain the given targeting effort and
eliminate funding gaps, districts would be expected to remit some
proportion of locally raised revenue to the state for redistribution
to poorer school districts.

--------------------
\69 For example, a state could choose to reduce the income-related
funding gap by a specified amount, rather than eliminate it entirely.
It also could choose to eliminate the funding gap without fully
equalizing the tax effort between poor and wealthy districts.  In
both cases, states could fund a lower state share and targeting
effort than our analysis shows.

OFFICIALS INTERVIEWED FOR CASE
STUDIES
=========================================================== Appendix V

To conduct our case studies, we interviewed the listed officials
associated with the following organizations, which included
associations, boards, departments, school districts, and
legislatures:

   KANSAS
--------------------------------------------------------- Appendix V:1

  -- Kansas State Department of Education--Deputy Commissioner

  -- Kansas State Board of Education--Member

  -- Kansas Association of School Boards--Director, Government
     Relations

  -- Kansas Legislative Research Department--Director

  -- Kansas United School Administrators--Executive Director

  -- National Education Association, Kansas Regional Office--Field
     Representative

   LOUISIANA
--------------------------------------------------------- Appendix V:2

  -- Louisiana Department of Education--Deputy Superintendent for
     Education Management and Finance, Administrative Director for
     Bureau of Educational Finance Services, Administrative Assistant
     for Bureau of Educational Finance Services

  -- St.  Martin Parish School District--Director, Curriculum and
     Instruction

  -- West Baton Rouge Parish School District--Superintendent of
     Schools

  -- Louisiana Board of Elementary and Secondary Education--Member,
     1st District

  -- Louisiana House of Representatives--Aid, House Appropriations
     Committee

  -- Louisiana School Boards Association--Director for School Finance

  -- Louisiana State University--Professor, Education Administration

   OREGON
--------------------------------------------------------- Appendix V:3

  -- Oregon Department of Education--Coordinator, School Finance and
     Data Information Services; Research Analyst

  -- Oregon School Board Association--Director

  -- Oregon Confederation of School Administrators--Director, Oregon
     School Services

  -- Oregon Legislative Revenue Office--Director, Former Aid

  -- Oregon Education Association--Director

   RHODE ISLAND
--------------------------------------------------------- Appendix V:4

  -- Rhode Island Department of Elementary and Secondary
     Education--Commissioner, Director of Finance

  -- Rhode Island Governor's Office--Policy Director, Education
     Issues

  -- Rhode Island State House--Vice Chairman, General Assembly House
     Finance Committee

  -- Rhode Island Association of School Committees--Executive
     Director

  -- Rhode Island Public Expenditure Council--Executive Director,
     Policy Analyst

(See figure in printed edition.)Appendix VI
COMMENTS FROM THE DEPARTMENT OF
EDUCATION
=========================================================== Appendix V

GAO CONTACTS AND STAFF
ACKNOWLEDGMENTS
========================================================= Appendix VII

GAO CONTACTS

Eleanor L.  Johnson, Assistant Director, (202) 512-7209
Jerry C.  Fastrup, Supervisory Economist, (202) 512-7211
Barbara Billinghurst, Preparatory Education Core Group Manager, (206)
287-4867

STAFF ACKNOWLEDGMENTS

Virginia Vanderlinde was the evaluator-in-charge, directing overall
analysis, cowriting the report, and supervising the Rhode Island site
visit.  Nancy Purvine supervised the review of the four case study
states and site visits to Kansas and Oregon and cowrote the report.
Peter Bylsma supervised the Louisiana site visit.  Stan Stenersen,
reports analyst, helped the team conceptualize and communicate the
message.

GLOSSARY
=========================================================== Appendix 1

      CATEGORICAL AID
------------------------------------------------------- Appendix 1:0.1

In this report, educational support funds from the state to local
districts that are earmarked for a specific purpose.

      ELASTICITY
------------------------------------------------------- Appendix 1:0.2

The percentage change in one variable relative to a 1-percent change
in another variable.

      EQUALIZATION
------------------------------------------------------- Appendix 1:0.3

In this report, a state's effort to compensate for differences in
districts' abilities to raise education revenues.

      EQUALIZATION EFFORT
------------------------------------------------------- Appendix 1:0.4

A measure of a state's share of education funding and the way the
state targets this funding to its districts on the basis of district
wealth.  It measures the proportion of the state's average funding
level that a state's school finance system enables all districts to
finance with an equal tax effort.

      EQUITY
------------------------------------------------------- Appendix 1:0.5

Equity in school finances involves the distribution of education
funding or resources.  To determine the equity of school finance
systems, experts recommend considering the following four issues:
(1) who benefits (taxpayers or public school students); (2) what
objects are equally distributed, such as revenues or key resources
(for example, curriculum and instruction) or outcomes (for example,
student achievement); (3) what principle is used for determining
whether distribution is equitable (such as vertical equity or fiscal
neutrality); and (4) the statistic used to measure the degree of
equity.

      FISCAL NEUTRALITY
------------------------------------------------------- Appendix 1:0.6

In a state, a definition of equity that asserts that no relationship
should exist between district spending per pupil and district wealth
per pupil such as income or property wealth.

      FISCAL NEUTRALITY SCORE
------------------------------------------------------- Appendix 1:0.7

In a state, the elasticity of district total (state and local)
funding relative to district wealth.  A fiscal neutrality score of 0
indicates that no relationship exists between district funding and
district wealth.

      FISCAL SUBSTITUTION
------------------------------------------------------- Appendix 1:0.8

In this report, a situation in which a local school district
substitutes new state grant dollars for its own locally generated
education revenue.  It can also refer to replacement of lost grant
revenue with new locally generated funds.

      RECAPTURE
------------------------------------------------------- Appendix 1:0.9

A feature in state education aid formulas in which local districts
that raise an amount of revenue per pupil in excess of the amount
allowed by the state must pay that excess to the state for
redistributing to poorer districts.

      TAX EFFORT
------------------------------------------------------ Appendix 1:0.10

In this report, the relationship between a district's taxable wealth
(based on property value or income) and the amount of local tax
revenues raised for education.

*** End of document. ***