I Changed My Mind On School Funding

I took the time to look more closely into the details of how schools are funded in the US.  I did this mostly out of curiosity about how local funding for schools (via property taxes) actually works, and what alternatives there might be.  I have heard that local funding contributes to differences in outcomes between poor and rich districts, since rich districts have more valuable properties.  And after researching I think the answer is that it does, but in most cases not so directly as I had assumed. There are a few variations of how this is handled and most states have mechanisms to smooth things out between districts.  I’m leaving federal money out of this discussion, because it is only about 10% of school funding.

The most basic way to do this is to have all non-federal funding come from property taxes.  Only the money raised locally goes to the schools. This would obviously result in a huge disparity between school funding in different districts.  The property in expensive districts is worth more, which gives more money for the same tax rate. It also makes it easier for the richer district to adjust its taxes because the prices are more elastic.  Consider a home worth $500,000 and one worth $100,000. At 1%, that’s $5,000 and $1,000 in taxes. A 1% raise (2% total) gets you $10,000 and $2,000. To put it another way, if these houses were in different districts, and an extra $2,500 were needed, taxes would have to increase by 0.5% in the district with the $500,000 house and by 2.5% – a five times bigger increase – in the district with the $100,000 house.  This example illustrates the basic idea of local funding, but no state funds schools entirely locally. Instead there are a variety of formulae that states use to address imbalances between districts.

Foundation grants are one such method, which are used by 36 of the 50 states in some capacity.  The name comes from the idea that foundation grants set a minimum funding per student amount.  These states also require school districts to have a local property tax to help pay. Any district under the foundation amount gets the difference made up by the state; any district over the amount gets no help from the state and gets to keep the extra money they raised.  The end result is that almost all schools will be at the foundation level, and the wealthiest outlier districts will be above it to some degree.

Some states calculate this based on the actual amount raised by each district and make up the difference; others base it on the minimum property tax required and pay that difference, but also allow the district to raise taxes higher.  For example, suppose State A and State B both have a foundation of $10,000 per student and a permitted property tax range of 1-4%. State A pays the actual difference between the money raised and $10,000. State B might pay the difference between a 1% rate and $10,000, even to districts who have chosen to raise their property taxes higher.  This means a school district that can raise $1,000 per student with a 1% rate always gets $9,000 from the state, even if the district raises its own taxes to 1.5% and gets $1,500 from that. The district now has $10,500 total. This system allows more districts to get above the foundation level. The richest districts – those that are over $10,000 even at 1% – still get nothing from the state, but the middle to upper-middle districts can now get a little bit over the foundation if they are willing to pay more locally than 1%.  The poorest or those otherwise unwilling to raise local taxes are no worse off, theoretically, as they still are brought up to the foundation level. 

A slight variation of the above is the guaranteed tax base variant of the foundation system.  The method is to set a foundation per tax rate. In other words, instead of setting the foundation at $10,000 overall, the state guarantees that each 1% of tax is worth $10,000.  When a district’s property values are such that each 1% nets $9,999 or less, the state makes up the difference. A district where 1% gets $500 would get $9,500 state funding for each 1% they pay themselves.  The locals can set the property tax at any legal level they wish within the band set by the state. This gives locals control over their own level of funding while not limiting them to only their own resources.  This helps fight against a psychological free rider problem – the locals who want better schools have to choose to pay a little more. It may be a fraction of the final funding with state aid, but at least it is an action of ownership instead of just leaving the tax rate at the minimum and getting a handout.  This process potentially lets the most schools districts get above the targeted minimum per student since every district that chooses to raise its taxes can do so and will end up with more student funding than the minimum.  

For some fun sliders that let you play with the effects of the different models above, see here.

The next most common model is the resource allocation model.  This is not so different in the math as illustrated above, except that rather than target a base funding per student, the target is based on the minimum number of resources (such as teachers, books, counselors, etc.) needed to run a school based on the district’s population, and funded to that level.  14 states use a resource allocation model or a hybrid model combining resource allocation and foundation models. Only Vermont and Wisconsin use neither of these systems.

The criticism sometimes leveled against school funding in America is that there are unequal levels of funding between the richest and poorest districts.  Some people also see racism in this as the poorest districts tend to be less white than the richest, although there are members of every race in both. Methods are sometimes proposed to counteract this, but I’m not sure how effective they would be.  

One is to keep the existing tax structures, but take back some of the extra money from rich districts that go over the targeted foundation levels.  The problem here is the basic one of the insurance death spiral. The more you took back, the more the rich districts would lower their taxes to the minimum allowed, decreasing the amount of money available, which would mean needing to take more money from the wealthier areas, and so on.

The logical conclusion is that to make it completely uniform or even to send more money to the poorer schools than to the rich, the state has to take over funding completely, controlling all the money and the taxes that raise it.  But I’m afraid that this would just result in total gridlock, especially in the setting of American culture. Everyone wants to give their children as much as they can and the political fighting that would result would be stupendous.  Also, I have no doubt that if public school funding the wealthy areas were lowered, the students would simply flee to private schools, or home schooling, or the students would all get hours of supplementary private tutoring to make sure they stayed ahead (as happens now in many Asian countries).  I’m also not sure what effect that would have on teachers. Currently teachers tend to move to better schools as they gain experience, due to the pay. If all schools had the same money I don’t think it would help that particular inequality. Either they would still try to work in schools in richer neighborhoods just to avoid the discipline problems and get a better work environment, or they’d stop teaching after they burned out and couldn’t get a raise.

The truth is, trying to help the poor by tearing down the rich is a pointless fight.  It’s better to raise people up and give them ownership. Which is why I have come to the conclusion I didn’t expect.  Our current models are actually pretty good from a structural point of view in that they allow for local autonomy and state help.  I especially like the variation of the foundation model that offers set funding per tax rate because it encourages increased local ownership.  That isn’t to say that poorer schools don’t need more funding. They probably do. But it means that I think we should simply focus the conversation on whether the given state’s base level needs to be raised and to what level rather than doing away with the system.

Leave a Reply

%d bloggers like this: