SCHOOL
FINANCE
A Policy Perspective
SECOND EDITION

ALLAN R. ODDEN
University of Wisconsin-Madison

LAWRENCE O. PICUS
University of Southern California

Boston

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McGraw-Hill Higher Education
A Division of The McGraw-HiU Companies

SCHOOL FINANCE
A POLICY PERSPECTIVE,

SECOND

EDITION

Copyright © 2000, 1992 by The McGraw-HilI Companies, Inc. All rights reserved. Printed in
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publisher.
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09876543

ISBN 0--07-228737-3
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Library of Congress

Cataloging-in-Publication


Data

Odden, Allan.
School finance: a policy perspective / Allan R. Odden, Lawrence
O. Picus.-2nd
ed.
p.
em.
Includes bibliographical references (p. ) and index.
ISBN 0--07-228737-3
1. Education-United
States-Finance.
2. Education-United
States-Finance-Computer
simulation.
I. Picus, Larry, 1954.
II. Title.
LB2825.0315
2000
99-15558
379.1'21'0973-dc21
CIP

www.mhhe.com


Contents
Preface


1

ix

INTRODUCTION AND OVERVIEW
TO SCHOOL FINANCE
1
1. The Scope of United States Education
Financing
2
2. Early Developments in School Finance
3. Evolution in the School Finance Problem
Traditional
A Different
The School
The School

2

6
11

Fiscal Disparities
11
Type of School Finance Problem
Finance Problem as Fiscal Adequacy
Finance Problem as Productivity

18
23

25

EQUITY AND ADEQUACY FRAMEWORKS
IN SCHOOL FINANCE
26
1. School Finance Litigation

27

Equal Protection Litigation
28
School Finance Equal Protection Litigation
School Finance Litigation Based on State
Education Clauses
35
A School Finance Legal Scorecard
45

31

2. A Framework for Assessing School
Finance Systems
46
The School Finance Framework in Brief
Ex Ante Versus Ex Post
48
Unit of Analysis
49
Objects
51

The Group
56
Equity Concepts
57

Conclusion

47

74
Hi


iv

Contents

3

THE PUBLIC FINANCE CONTEXT

79

1. Taxation OveIView

80
Trends in Federal, State, and Local Taxation
Changes in Tax Structures
82


80

2. Assessing and Understanding Taxation

86

Public Finance Criteria for Evaluating Taxes

3. Analysis of Individual Taxes

86

97

The Income Tax
97
The Sales Tax
105
The Property Tax
119
Lotteries
137

4. Intergovernmental Fiscal Relations

139

Advantages of a Federal Approach to Financing
Governmental Services
140

Mandates and Their Use in Intergovernmental
Relations
142
Intergovernmental Grants and Their Objectives
Alternative Measures of Fiscal Capacity
150
Final Comments on Taxation and
Intergovernmental Grants
152

4

144

SCHOOL FINANCE STRUCTURES: FORMULA
OPTIONS AND NEEDS ADJUSTMENTS
154
1. School Finance Equity, Adequacy,
and Policy Goals
155
2. School Finance Formulas
156
General-Aid School Finance Programs
159
Flat Grant Programs
161
Foundation Programs
167
Guaranteed Tax Base Programs
179

Combination Foundation and Guaranteed Tax
Base Programs
189
Full-State Funding and State-Determined
Spending Programs
195

3. Adjustments for Student Needs, Education Level,
Scale Economies, and Price
197
Adjustments for Different Pupil Needs
Development of Special-Needs Programs

197
198


Contents

v

Issues in Determining Costs of Special-Needs
Programs
203
Simulation of Adjustments for Special-Needs
Students
224
Adjustments for Different Grade Levels
226
Adjustments for Size

230
Adjustments for Price Differences
232
Conclusion
234
A New School Finance Formula
235
An Econometric Approach to Adjustments for
Different Needs
235
Chapter 4 Problems
237

5

IMPROVING STATE SCHOOL FINANCE
SYSTEMS
241
1. A Framework for Analysis
241
2. School Finance in Vermont
243
The Vermont School Finance Problem
244
Improving the Vermont School Finance System
3. School Finance in Wisconsin
249
The Wisconsin School Finance Problem
250
Improving the Wisconsin School Finance System

4. School Finance in Illinois
255
The Illinois School Finance Problem
256
Improving the Illinois School Finance Structure
Conclusion
262

6

246

252

258

ALLOCATION AND USE OF FUNDS
AT THE DISTRICT, SCHOOL, AND
CLASSROOM LEVELS
264
1. Resource-Use Patterns at the National
and State Levels
266
Expenditures by Function
266
Staffing Patterns
269
2. Resource-Use Patterns at the District Level
Expenditure Patterns across Districts
within a State

272
District Usesof New Money
277

271


vi

Contents

3. Resource-Use Patterns at the Site Level
Expenditures by School and Classroom

Summary and Conclusion

7

279
279

286

WAYS TO IMPROVE EDUCATIONAL
PRODUCTIVITY
288
1. Measuring Educational Productivity

289


What Is a Production Function?
289
Linking Spending to Student Outcomes:
Economic Research
291
Why Is Educational Productivity So Elusive?
New Ways to Assess Educational Productivity
Reducing Class Size: A Brief Synthesis
of the Literature
299
Alternatives to Class-Size Reduction
306
Market Approaches
309

2. Improving Educational Performance
Through Decentralized Management

8

296
297

312

USING EDUCATION DOLLARS MORE WISELY
TO IMPROVE RESULTS
323
1. Examples from School Restructuring
2. Staffing in America's Schools

327
3. Resource Reallocation Possibilities

324

330

Selected High-Peiformance School Designs
332
What about Low-Spending Districts?
342
The Reason Resource Reallocation Is Possible
342

4. The Process of Resource Reallocation
5. Resource Reallocation in New Jersey

9

345
349

CREATING AN EDUCATION SYSTEM
WITH INCENTIVES
352
1. Incentives for Students

353

Standards for Being Promoted from One Education

Level to the Next
355
Standards for Graduation from High School
357


vii

Contents

Requirements for Admission into Higher
Education
359
Additional Incentives for Students
360
Opportunities to Participate in Extracurricular
School-Organized Activities
361

2. Incentives for Teachers

362

Goal Clarification Via Mission, Standards,
and Testing
362
Opportunities to Work Collaboratively to Improve
the School
363
Opportunities to Improve Professional Practice

364
Incentives to Improve Knowledge and Skills
365
Incentives to Improve Student Performance
366

3. Incentives for Schools

367

Incentives for Restructuring toward
Higher-Performance Visions
367
Incentives for Reallocating Education Resources
to More Productive Uses
370
Incentives for Producing Increases
in Student Achievement
371

Summary

10

371

SCHOOL-BASED FINANCING: FORMULA FUNDING
OF SCHOOL SITES
373
1. The Overall Structure of a School Site-Based


Financing System
374
2. The Minimum School Percentage
3. District Roles and Functions
Core District Functions
Optional District Functions

4. The School Budget

376
378

379
384

392

Functions Devolved to School Sites
The School Budget
393
Example of a School Formula
398

Conclusion

399

392



viii

Contents

11

CHANGING TEACHER SALARY
STRUCTURES
403
1. Link to Standards- and School-Based
Education Reform
404
2. Change Teacher Compensation to Include Pay
for Knowledge and Skills
406
A New Form of the Single-Salary Schedule
406
A Knowledge and Skill Pay Structure
407
Examples of Knowledge- and Skills-Based Pay
Structures
411
Implementation Issues
413
3. Provide School-Based Performance Incentives
414
Examples of School-Based Performance Awards
418
Research on School-Based Performance Awards

420
4. An Example of a Comprehensive New Teacher
Compensation System
423
Conclusion
425
Appendix
Glossary
References

426
430
436

Author Index

466

Subject Index

473


Preface

Public school financing in the United States is a big business; it involved over
$300 billion, 47 million children, and nearly 5 million teachers, administrators,
and staff in 1999. School finance has and continues to be a top-priority policy issue at the state and local levels, and one of the top issues the public identifies as
needing attention at the national level as well. Further, both adequacy of funding
in general and the productivity of the use of education dollars in particular are

the issues that are leading school finance policy deliberations today.
In this second edition of School Finance: A Policy Perspective, we continue
the emphasis of the first edition on the use of education dollars and the need to
use current and all new dollars on more effective programs and services, in short
to improve the productivity of the education system. Our goals in the second edition are to update the material in the first edition, and to provide a discussion of
recent research in school finance, including how: the push for education adequacy, the need to meet high and rigorous educational standards, resource allocation and use for higher performance, site-based management of schools, and
teacher compensation might impact the funding for our nation's schools in the
early years of the next century. The book also includes a revised and enhanced
school finance simulation that enables students, professors and researchers to use
the World Wide Web ( />to simulate the effects of different school finance structures on both a 20-district sample of districts
and universe state data sets. E-mail
to obtain the password
to the simulation.
The second edition has four major sections:
• an introduction, which provides an overview for the issues subsequently
addressed,
• four chapters on equity and adequacy for districts, schools, and students,
including state case studies of school finance problems and their resolution,
• three chapters on issues related to improving the productivity and effectiveness of the education system, and
• three chapters on the finance aspects of policy and management innovations designed to improve the country's public schools.
ix


x

J>re~ace

1. INTRODUCTION AND OVERVIEW
Chapter 1 serves as an introduction to the topic of school finance. It begins with
information on the current status of funding for public K-12 education in the

United States, showing how much is spent, the source of those funds, and how
levels and sources of funding have changed over time. It shows that as a nation,
we spend a great deal of money on K-12 education and that the amount we
spend has grown considerably over time. Chapter 1 also discusses the manner in
which school finance inequities have changed over the last 30 years. The chapter
discusses the "traditional" school finance inequities in several states. In these
states, districts with lower property wealth per pupil tend to have lower expenditures per pupil-even
with higher school tax rates-than
do districts with higher
per-pupil property wealth. These high-wealth districts tend to have higher perpupil expenditures even with lower school tax rates.
The chapter then shows that several states today have what the book terms
the "new" school finance problem: higher wealth districts with higher expenditures per pupil but also higher tax rates, and lower property wealth per-pupil districts with lower expenditures per pupil but also lower school tax rates. The chapter suggests that remedying these different types of fiscal inequities might
require very different school finance reform strategies. Finally the chapter discusses briefly how the issue of "adequacy" has entered the school finance policy
agenda.

2. EQUITY IN SCHOOL FINANCE: PROBLEMS,
ISSUES, FRAMEWORKS, AND NEW
APPROACHES
Chapter 2 addresses frameworks for assessing school finance problems and challenges. It first modifies the Berne and Stiefel (1984) equity framework that was
used in the first edition of the text, adding a discussion of such issues as ex ante
versus ex post equity perspectives, the unit of analysis, and various elements of
equity including the group, the object, and different measures of horizontal and
vertical equity. The chapter includes a new horizontal equity statistic, the Verstegen Index, which measures the variation in the top half of the distribution, compared to the McLoone Index, which assesses the equity of the bottom half. The
chapter also adds the concept of adequacy to the overall framework and presents
an adequacy statistic, the Odden-Picus Adequacy Index.
The second half of Chapter 2 reviews the evolution of school finance court
cases, from the initial Serrano v. Priest decision, through the adequacy cases in
the mid- to late 1990s, to the hoped-for final, 1998 decision of the New Jersey
Supreme Court in that state's 25-year-Iong legal battle over the equity and adequacy of its school finance system.
Chapter 3 reviews the public finance context for school finance, analyzing

the base, yield, elasticity, equity, and adequacy of income, sales, and property


Preface

taxes as revenue sources for public schools. It discusses mechanisms to improve
the incidence of the property tax, and reviews the various property tax limitations
states have enacted on this primary public school revenue source. This chapter
also updates the material in Chapter 4 of the fIrst edition, focusing on how grants
from one level of government to another impact decision making in the recipient
government.
Chapter 4 describes the core elements of state school fInance formulas:
base allocations provided through flat grant, foundation, guaranteed tax base (district power equalizing and percentage equalizing) and combination formulas, and
adjustments for differences related to special needs of students, schools, and districts. The chapter describes these various elements and discusses generally how
they work, using a 20-district sample in a new computer simulation program. The
focus of this chapter is on how different school fInance formulas work (Le., their
costs and their effects on horizontal and vertical equity, as well as adequacy). The
chapter includes a discussion of three different methods for determining an "adequate" base spending level-costing
out inputs, linking a spending level to a performance level, and costing out effective school designs.
Chapter 4 also discusses the rationales for and types of adjustments for
three categories of special-needs children: those from low-income backgrounds,
those with physical and mental disabilities, and those with limited English profIciency. The portion on disabilities draws heavily from the work conducted by the
National Center on Special Education Finance. In addition, the chapter discusses
various rationales for different adjustments for students at different education
levels (elementary, middle, and high school) and adjustments for price differences across states and geographical regions within states (Chambers, 1995;
McMahon, 1994). The chapter further discusses the issue of scale economies and
describes different ways states adjust for smallllarge size or rural isolation.
Chapter 4 also includes a section on new economic-oriented
research using
the cost-function approach to determine a level of funding needed in each district/school in a state to produce a set level of outcomes, given different characteristics of students and the local community. This research provides a number

that can be used as the foundation spending level, and then a global "cost adjustment" is applied to the foundation amount that accounts for differences in student need, input prices, scale, and even effIciency.
Chapter 5 uses the analytic tools identifIed in Chapter 4 to "solve" different
kinds of school fInance problems, using universe district data from three states
representing different kinds of school fInance situations. This chapter uses the
simulation program, available on the web page of McGraw Hill (www.mhhe.com/
schoolfInance), adapted for individual states. Over time, this web site should have
data sets for all or nearly all of the 50 states.
The Vermont state data set discussed in Chapter 5 presents the traditional
school fInance problem of unequal distribution of funds due to the unequal distribution of wealth. The chapter shows how traditional school fInance models can
be used to increase horizontal equity, fIscal neutrality, adequacy, and adjustments
for different student needs.


xii

Preface

The Wisconsin state data set presents the "new" finance problem. In this
instance, the wealthiest districts are relatively high spending but also have relatively high tax rates, while the poorest districts tend to be low spending as well as
exert low tax efforts. The chapter shows how GTB programs exacerbate fiscal equity for such a state and identifies alternative school finance mechanisms to improve equity and adequacy.
The Illinois state data present a finance situation that is not only tricky to
resolve but also requires substantial additional resources both on adequacy and
property tax-reduction grounds.
The goal in Chapter 5 is to show how various elements of school finance
structures can be used to resolve different types of school finance problems. For
each state, the chapter includes both an analysis of the kind of school finance
problem that the state presents and the effectiveness or ineffectiveness of different school finance formulas in resolving the problem.
One of the problems often encountered in school finance is that funding
formulas are either established in a vacuum, or their parameters are the result
of available dollars. In the context of the above state cases, this chapter uses policy "targets" to help remedy the school finance problems identified. For example, a state might decide that it wants to provide a certain minimum level of

support for all schools equal to 90 percent of the average spending of a certain
type of district. Or alternatively, policymakers may feel that all districts should
have access to funds equal to the district at some fixed percentage of wealth.
The simulation is used to help students understand and determine logical policy
targets and to assess their impact on the school finance problems in the different
states.
Over time, we will attempt to have a universe data set for each state that
will include local revenues, state general aid, state categorical aid for disabled,
low income, and limited English proficient students, base pupil counts, and the
number of students eligible for free and reduced lunch (or some similar count of
students from low-income backgrounds), the number of disabled students and
the number oflimited-English proficient students. The state simulations then will
allow students to simulate numerous different basic school finance structures as
well as different pupil weights to address these three categories of special student
needs.

3. ADEQUACY, PRODUCTIVITY,
AND EFFICIENCY: PROBLEMS,
AND NEW APPROACHES

ISSUES,

This section includes three chapters: Chapter 6 on allocation and use of educational dollars, Chapter 7 on alternative approaches to improving educational productivity, and Chapter 8 on resource reallocation at the site level.
Chapter 6 provides a detailed analysis of the way states, districts, and


Preface

schools allocate and use educational resources. It summarizes research on this
topic, using data on national, state, and universe district bases, and limited research on school-level databases. The conclusion of this chapter is that there are

surprisingly common patterns to the uses of the education dollar. It also shows
that during the past 30 years, the large bulk of new dollars has been used to provide services other than the regular, core instructional program. Finally, the chapter concludes that while these uses reflect good values-more
money for many
categories of special-needs students-the
specific uses of those new dollars have
not produced much impact on student learning. The implication of these findings
is that we need to retain the values behind these extra resources but find more effective uses for all education dollars.
Chapter 6 also includes a discussion of the difficulties of collecting schoollevel fiscal and personnel data, while arguing that such site-level data are crucial
to the task of improving the use of educational resources.
Chapter 7 summarizes several literatures concerning how to improve educational productivity (Le., how to improve results with the current dollars in the
education system):

• the economics production function literature,
• the choice, charter, and vouchers literature, and
• the high-performance management literature.

The chapter identifies the school finance implications of these three topics,
which are then addressed more fully in subsequent chapters: more effective uses
of education dollars that flow largely from resource use in comprehensive, wholeschool designs; needs-based formula funding of school sites, which is an implication of the high-performance management literature, as well as choice and charter policies; performance incentives; and teacher compensation.
Chapter 8 addresses the issue of resource reallocation to school strategies
that produce higher student performance. It first uses 1994-95 Schools and
Staffing Survey data to show how a 500-student elementary, a 1,000 student
middle, and a 1,500 student high school are typically staffed in different regions
of the country. It then describes how a series of new school models are staffed
and structured, focusing on the two most expensive that were developed under
the auspices of the New American Schools. It shows how the new school designs
use their funds differently to provide educational services and describes the
things that schools should consider in implementing these models. This chapter
does not make definitive conclusions about the impact of these new school designs, but does show how these various emerging school designs have a cost
structure that is different from traditional schools, and thus use dollar resources

differently.
This chapter also shows that there may be sufficient resources in some regions to fund these emerging higher-performing school models, but insufficient

xiii


xiv

Preface

resources in others, thus suggesting that cross-state
spending need to be considered at some point.

differences

in educational

4. POLICY AND MANAGEMENT INNOVATIONS
FOR ADDRESSING EQUITY, ADEQUACY, AND
PRODUCTIVITY IN SCHOOL FINANCE
This section includes three chapters on policy and management innovations that
can help improve both the equity and effectiveness of current education and
school finance systems: Chapter 9 on system incentives, Chapter 10 on formula
funding of schools, and Chapter 11 on new approaches to teacher compensation.
Chapter 9 describes how states and districts can create a variety of incentives for improving student performance, and identifies finance implications for
many of those strategies. It identifies incentives for students, teachers, and
schools, and concludes that all are needed. The primary finance implications
from this chapter are that schools need more power and authority over their budget (a conclusion of the management section of Chapter 7 as well), and that
teacher compensation systems also could be changed.
Implementing many of the strategies described in the previous chaptersschool-based management, resource reallocation at the site, public school choice,

charter school programs, and many system incentives-requires
school-based
funding models. Chapter 10 assesses the types of models that could be developed. The chapter first suggests that states should adopt a school-based budgeting framework that would guide each district in designing a needs-based formula
funding system for resourcing its schools. The proposed framework is a modified
and Simplified version of the framework originally developed by Odden and
Busch (1998). The framework suggests that even in a decentralized system, several functions need to remain at the district level. It also identifies several functions that would be performed by the site. And it identifies several other functions that could remain at the district or be devolved to the site over time,
decisions that could vary by district. This chapter also identifies the different issues districts need to address in designing school-funding formulas, once they
have decided how much of the operating budget they will provide in a lump sum
to their school sites.
The single largest expenditure for all schools and school districts is teacher
salaries and benefits. Since it is teachers who have the main day-to-day contact with
students, new teacher compensation programs have potential for creating teacher
incentives that could result in improved student achievement. Chapter 11 summarizes several proposals for changing how teachers are paid. This chapter describes
how to modifY the single-salary schedule to include salary increments for teacher
knowledge and skills, as well as salary bonuses for all teachers and staff in schools
that meet or exceed system-determined performance-improvement
targets. This
chapter describes programs that reflect these new approaches that already are operating around the country, and summarizes research on their impacts.


P~~ce

APPENDIX:

~

THE SIMULATION

An integral part of this book is the school finance simulation designed to accompany the text. We have made a number of improvements to the simulation that
accompanied the first edition of this book. The originallO-district

simulation has
been updated to include a total of 20 districts. Additionally, two new school finance statistics are provided: the Verstegen Index and the Odden-Picus Adequacy Index. The 20-district simulation is designed to accompany Chapter 4. We
found that the previous simulation dramatically improved student understanding
of the statistics used by the school finance profession, and helped them better understand the myriad complexities involved in making changes to a state's schoolfunding system. The 20-district simulation that accompanies this edition should
continue that tradition.
The simulation is available on the World Wide Web, from McGraw-HilI's
web site at />The appendix describes the general use of the simulation, and provides information on how to access it from the
World Wide Web. Additional documentation will be available on the web site.
In addition to the 20-district simulation, we are working to provide versions
of the simulation for each of the 50 states. Information on what is available and
the status of the current data for each state will be posted on the web site. We
hope it will help students, teachers, researchers, and policymakers improve their
understanding of important school finance concepts.
At the end of the preface of the first edition we said, 'We hope this will
help the country accomplish its goals of having all students learn to think, solve
problems and communicate, graduate from high school, and be first in the world
in mathematics and science." We continue this hope with this edition.

ACKNOWLEDGMENTS
Writing a book almost always is the result of activities far beyond those of the authors. To be sure, the authors are primarily responsible for the text, and responsible for errors and omissions, but without insight, assistance, support and work of
others, a book might never see the light of day. We would like to thank the people
who played major roles in helping us produce the second edition of this book.
First, Sarah Archibald, a researcher in the University ofWisconsin-Madison offices of the Consortium for Policy Research in Education (CPRE), and
Anita Tychsen, a Ph.D. student and a CPRE research assistant, worked tirelessly
on most portions of the book, but particularly Chapters 2, 4, and 7. They
searched out research reports needed for the text revision, they found missing
data files crucial to empirical findings, and they filled in details too numerous to
mention. Both their careful assistance and continuous encouragement to complete this endeavor are greatly appreciated.
Lisa Armstrong, administrative assistant in the UW CPRE offices, and Kelley Hewitt, a secretary in those offices, were enormously helpful in the word



xvi

Preface

processing needed to produce the final manuscript; they entered the editorial
changes, kept track of the most recent files, and produced faultless final copy. As
usual, Lisa was the pre-eminent citation sleuth, tracking down innumerable citations that either simply needed to be found or needed completion. Without their
help, we would still be at the computer or in the library.
A special thank you to our reviewers David H. Monk, Cornell University;
Leanna Stiefel, New York University; and Karen Hawley Miles, Education Resources Management Strategies.
We also would like to acknowledge the many, unnamed individuals at the
national, state, district, and school level who have allowed us, as well as others, to
conduct research on their use of education resources over the past eight years.
Without this research, a revised edition might not have been required. But as we
hope will be obvious, the landscape of school finance has changed over the past
few years. What we know about the nature of these changes has depended on the
cooperation of those involved in letting outside individuals intrude into their domain, research what they do, and write up the results.
Finally, we would like to thank our families, who once again have endured
our working on the computer rather than engaging in family activities. Their support and sustenance knows no bounds, and we are grateful for their understanding, love, and steadfast support.
Allan R. Odden
Madison, Wisconsin

Lawrence O. Picus
Los Angeles, California


ABOUT THE AUTHORS
Allan R. Odden is a Professor of Educational Administration at the University of
Wisconsin-Madison.

He also is Co-Director of the Consortium for Policy Research in Education (CPRE), which is funded by the U.S. Department of Education, the director of the CPRE Education Finance Research Program, and principal investigator for the CPRE Teacher Compensation project, funded by the Pew
Charitable Trusts and the Carnegie Corporation. CPRE is a consortium of the
University of Wisconsin-Madison,
Pennsylvania, Harvard, Michigan, and Stanford Universities. He formerly was professor of Education Polley and Administration at the University of Southern California and Director of Policy Analysis for
California Education (PACE), an educational policy studies consortium of USC,
Stanford University, and the University of California, Berkeley.
Odden is an international expert on education nnance, school-based nnancing, resource allocation and use, educational policy, school-based management,
teacher compensation, district and school decentralization, education incentives,
and educational policy implementation. He worked with the Education Commission of the States for a decade, serving as assistant executive director, director of
polley analysis and research, and director of its educational nnance center. He was
president of the American Educational Finance Association in 1979-80, and
served as research director for special state educational nnance projects in Connecticut (1974-75), Missouri (1975-77), South Dakota (1975-77), New York
(1979-81), Texas (1988), New Jersey (1991), and Missouri (1992-93). In 1999, he
was directing research projects on school nnance redesign, resource reallocation,
and teacher compensation. He was appointed Special Court Master to the Remand Judge in the New Jersey Abbott v. Burke school nnance court case for 1997
and 1998. Odden has written widely, publishing over 170 journal articles, book
chapters, and research reports, and 20 books and monographs. He has consulted
for governors, state legislators, chief state school officers, national and local
unions, The National Alliance for Business, the Business Roundtable, New American Schools, the U.S. Congress, the U.S. Secretary of Education, many local
school districts, the state departments of education in Victoria and Queensland,
Australia, and the Department for Education and Employment in England.
His books include Financing Schools for High Perfomwnce: Strategies for
Improving the Use of Educational Resources (Jossey-Bass, 1998) with Carolyn
Busch; Paying Teachers for What They Know and Do: New and Smarter Compensation Strategies to Improve Schools (Corwin Press, 1997) with Carolyn Kelley; Educational Leadership for America's Schools (McGraw-Hill, 1995); Rethinking School Finance: An Agenda for the 1990s (Jossey-Bass, 1992); School Finance:
A Policy Perspective (McGraw-Hill, 1992) coauthored with Lawrence Picus; Education Policy Implementation
(State University of New York Press, 1991); and
School Finance and School Improvement: Linkages for the 1980s (Ballinger,
1983).
Odden was a mathematics teacher and curriculum developer in New York
City's East Harlem for nve years. He received his Ph.D. and M.A. degrees from

xvii


xviii

Preface

Columbia University, a Masters of Divinity from the Union Theological
nary, and his B.S. from Brown University.

Semi-

Lawrence O. Picus is a Professor in the Rossier School of Education at the U niversity of Southern California. He serves as the director of the Center for Research in Education Finance (CREF), a research center in the School of Education at the University of Southern California. CREF research focuses on issues of
school finance and productivity. He has also conducted research on the costs of
alternative assessment programs for the Center for Research on Evaluation, Student Standards and Testing (CRESST) at UCLA.
Picus is past-president of the American Education Finance Associa~ion. He
is the coauthor of Principles of School Business Administration (ASBO, 1995)
with R. Craig Wood, David Thompson, and Don 1. Tharpe. In addition, he is the
senior editor of the 1995 yearbook of the American Education Finance Association, Where Does the Money Go? Resource Allocation in Elementary and Secondary Schools (Corwin, 1995). He has published numerous articles in professional journals as well.
Picus' teaching responsibilities include courses in school finance, educational policy, school business administration, school district budgeting, economics
of education, the politics of education in the United States, and the application of
computers to school district management. In his role with CREF, he is involved
with studies of how educational resources are allocated and used in schools across
the United States. He has also conducted studies of the impact of incentives on
school district performance. Picus maintains close contact with the superintendents and chief business officers of school districts throughout California and the
nation, and is a member of a number of professional organizations dedicated to
improving school district management. He also serves as a consultant to the N ational Education Association, American Federation of Teachers, the National
Center for Education Statistics, WestEd and the states of Vermont, Washington,
and Arkansas.
Prior to coming to USC, Picus spent four years at the RAND Corporation,

where he earned a Ph.D. in Public Policy Analysis. He holds a Masters Degree in
Social Science from the University of Chicago, and a Bachelors degree in Economics from Reed College. He has a strong background in research design, statistics, and econometrics.


To my wife, Eleanor, best friend,
critical colleague, and tireless
supporter.
Allan Odden
For Matthew, who has
reinforced my belief in the
importance of this work
Larry Picus


Introduction
and Overview
to School Finance
School finance concerns the distribution and use of money for the purpose of
providing educational services and producing student achievement. For most of
the twentieth century, school finance policy has focused on equity-issues
related
to widely varying education expenditures per pupil across districts within a state
and the uneven distribution of the property tax base that is used to raise local education dollars. In the 1990s, new attention began to focus on education adequacy and productivity-the
linkages among level of funds, use of funds, and
amounts of student achievement. As the 1990s end and the twenty-first century
begins, policymakers increasingly want to know how much money is needed to
educate students to high standards; how those dollars should be distributed effectively and fairly among districts, schools, programs and students; and how both
level and use of dollars affect student performance. These policy demands are
pushing school finance beyond its traditional emphasis on fiscal equity.
This book moves school finance in these new directions. It emphasizes the

traditional equity issues and also discusses adequacy and productivity issues, including what is known about the linkages among dollars, educational strategies,
and student performance. The 1980s and the 1990s were remarkable not only for
the intensity of the school reform movement, but the duration of interest in educational reform. Today, standards-based reform elements from content standards
to charter schools to new accountability structures seek to teach students to high
levels. In most instances, the implications of these reforms on school finance have
not been fully considered, though Odden and Clune (1998) argued that traditional school finance systems were "aging structures in need of renovation." During the 2000s, states and their respective school districts will need to rethink
school finance systems to meet the productivity expectations and accountability
requirements inspired by these reforms.
This book takes a policy approach to school finance analysis. It is important
for graduate students in education, as well as educators and education policy

1


2

~~~1
makers, to understand both the finance implications of school reform policies,
and equally important, to understand how decisions about the distribution of
funds to local schools and school districts affect the implementation of those reforms. The book begins with a discussion of traditional school finance issues, including the legal issues surrounding school finance, analysis of general taxation
systems, intergovernmental
grants, and traditional school finance formulas. The
analysis of school finance formulas is supplemented with a computer simulation
designed to allow students the opportunity to simulate the effects of different
school finance distribution decisions on a sample of school districts. By designing
their own school finance formulas and simulating the effect on a sample of school
districts, students will have a more realistic sense of how changes in funding formulas impact school districts across a state. The simulation will help students understand the technical and political complexities that result when one attempts to
redesign school-funding programs.
The book then moves beyond this traditional approach to school finance,
and in a series of chapters discusses important issues for the 2000s and how they

relate to school finance. Included are chapters dealing with allocation and use of
funds at the district and school levels, teacher salaries and compensation structures especially as they can be redesigned to improve productivity, site-based
management, educational choice programs, fiscal incentives, and the financing of
broad education programs shown by research to improve student performance.
In each of these areas, current research and state activity are summarized, and
the implications for school finance programs are discussed.
This introductory chapter has three sections. Section one outlines the scope
of school finance within the United States; funding public schools is big business,
and this section outlines its fiscal magnitude. Section two provides a quick history
of school finance developments, beginning in the seventeenth century. This section shows how schools evolved from privately funded, parent- and church-run
entities to the large publicly and governmentally controlled education systems of
today. The last section discusses several examples of the "school finance problem"
and how it has evolved from the traditional fiscal disparities across districts to the
new issue of education adequacy.

1. THE SCOPE OF UNITED STATES
EDUCATION FINANCING
Education is an enormous enterprise in the United States. It constitutes the
largest portion of most state and local governmental budgets; engages more than
100,000 local school board members in important policy-making activities; employs millions of individuals as teachers, administrators, and support staff; and educates tens of millions of children.
Figure 1.1 provides detail on public school enrollment, including numbers
of school districts and schools during most of the twentieth century. Enrollment
was relatively constant during the 1930s and 1940s, but rose quickly after World



4

Chapter 1
War II as the post-war baby boom became school-aged. After 25 years of rapid

enrollment growth, public school enrollment declined during the 1970s and then
began to grow again in the mid-1980s as the children of the baby boom generation began to enter schools. In 1989-90, public school enrollment was estimated
to be just over 40 million students, having peaked at slightly above that level during the 1970s.
One of the major stories of this century has been the consolidation of
school districts into larger entities. In 1995, there were 14,881 school districts,
the lowest number during this century. In 1940, by contrast, there were 117,108
school districts. The number of school districts dropped by almost 40,000 between 1940 and 1950 (Le., after World War II), and then dropped by another
40,000 districts between 1950 and 1960. During the 1970 school year, there were
only 17,995 local school districts. The number of districts varies across the states,
however, with Texas and California each having more than 1,000 districts in 1990,
and Hawaii having one, statewide school district.
Interestingly, as will be discussed below, although school district consolidation entails consolidation of the local property tax base, remaining inequities in
local school financing after the bulk of consolidation had occurred led courts during the late 1960s and early 1970s to declare finance structures unconstitutional
(see Chapter 2).
Figure 1.1 also shows that the number of public schools has dropped over
time while enrollments have risen, indicating that schools too have grown in size
during the twentieth century. There were over 262,000 public schools in 1930,
but that number had dropped by a factor of more than four to around 65,000
schools in 1995. On the other hand, the number of private schools has risen since
1930, from a low of about 12,500 then to around 34,000 today, almost triple the
number of 1930.
Funding public schools requires large amounts of dollars. In 1995, public
school revenues totaled $273.1 billion, an increase of more than $64 billion from
the 1990 total of $208.5 billion (Figure 1.2). Indeed, the data show that public
school revenues more than doubled during each decade from 1940 to 1990, a remarkable fiscal record.
Figure 1.2 also shows that during this century, public education consumed
an increasing portion of the country's total economic activity (the gross domestic
product) until 1970, then dropped a bit during the enrollment decline of the
1970s, and has recently increased almost to the 1970s' level. The same pattern is
true for total public school revenues as a percent of the country's personal income. In short, the country devotes approximately 4.5 percent of its personal annual income to public schools, a considerable portion considering all the other

items that individuals could purchase with annual income either themselves or
through government tax revenues.
This comment is undergirded by the data in Figure 1.3. Column 2 shows
that real expenditures per pupil (Le., expenditures adjusted by the Consumer
Price Index), have increased each decade at extraordinarily high rates: 100 percent between 1920 and 1930, 67 percent during the 1960s, and 36 percent during


Introduction

5

and Overview to School Finance

FIGURE 1.2 Educational Revenues, GDP, and Personal Income
(Billions), 1930-95

Year
1930
1940
1950
1960
1970
1980
1990
1995

Total
Educational
Revenues
$


Gross
Domestic
Product (GDP)

2.1
2.3
5.4
14.7
40.3
96.9
208.5
273.1

Revenues
as Percent
of GDP

$ 104
101
295
527
1,036
2,784
5,744
7,254

Source: National Center for Education

2.0

2.3
1.8
2.8
3.9
3.5
3.6
3.8

Year
1919-20
1929-30
1939--40
1949-50
1959-60
1969-70
1979-80
1989-90
1994-95
1995-96
1996-97

Real

per Pupil

Nominal

$ 333
667
868

1,252
1,895
3,155
4,275
5,810
5,840a
5,939a
6,060a

$

40
72
76
187
350
750
2,089
4,643
5,528a
5,774a
6,060a

Source: National Center for Education

$

Revenues
as Percent
of PI


85
78
230
413
837
2,293
4,804
6,112

per Pupil and Revenues

Total
Revenues
(in Millions)
$

970
2,089
2,261
5,437
14,747
40,267
96,881
208,548
273,138
286,411 b
299,995b

Percent


by

Revenues
Source

Federal

State

Local

0.3
0.4
1.8
2.9
4.4
8.0
9.8
6.1
6.8
7.0b
6.9b

16.5
16.9
30.3
39.8
39.1
39.9

46.8
47.1
46.8
48.1b
48.9b

83.2
82.7
68.0
57.3
56.5
52.1
43.4
46.8
46.4
45.0b
44.2b

Statistics, Digest of Education

Statistics, 1997.

a Data estimated.
b

Source: National Education

2.5
2.9
2.3

3.6
4.8
4.2
4.3
4.5

Statistics, Digest of Education Statistics, 1997.

FIGURE 1.3 Educational Expenditures
by Source, 1920-97
Expenditures

Personal
Income (PI)

Association, 1996-97 Estimates of School Statistics.


6

~~~1
the 1970s. Even during the 1980s, a decade of government tax and expenditure
limitations, expenditures per pupil increased by 36 percent to a total of $5,810 for
current operating purposes in 1989-90. It seems that real resources for public
school students have risen substantially each decade.
These facts certainly are at odds with popular perceptions that schools do
not get much more money each year. Though real resources might increase only
1-3 percent each year, over a 10-year time period, that amounts to nearly a onethird increase in real resources, a substantial increase.
The last columns in Figure 1.3 show that the sources of school revenues have
changed over the years. Earlier in the century, local districts provided the bulk of

school revenues, and the federal role was almost nonexistent. Beginning in the
1960s, the federal government began to increase its financial role, which reached
its maximum at 9.8 percent in 1980. Since then, the federal contribution has
dropped by almost one-third. Today, the states are the primary providers of public
school revenues, surpassing local school districts sometime in the 1970s' era of
school finance reforms. During the 1996-97 school year, on average the states provided 48.9 percent of public school revenues, local districts (primarily through the
local property tax) 44.2 percent, and the federal government 6.9 percent.
These national patterns, however, are very different in each of the 50 states,
as shown by Figure 1.4. The national average expenditure per pupil was $5,988 in
1994-95, but expenditures ranged from a low of $3,656 in Utah to a high of
$9,774 in New Jersey, a difference of almost three-to-one.
States also differ in the sources of public school revenues. In Hawaii, for example, 90 percent of revenues derive from the state, while in New Hampshire
only 7.3 percent of school revenues come from state sources. States provide over
60 percent of school revenues in 11 states, while local districts provide over 60
percent of school revenues in six states. This variation reflects differences in local
perceptions of appropriate state and local roles, as well as differences in school finance formula structures (Gold, Smith, and Lawton, 1995). These data document
one enduring characteristic of state school finance structures: though there are
some similarities, the differences are dramatic. Students of school finance need
to understand both the generic similarities and the factors causing the specific
differences.

2. EARLY DEVELOPMENTS
FINANCE

IN SCHOOL

The country has not always had a system of free, tax-supported schools. Free,
public education was an idea created in the United States during the nineteenth
century, and the large network of public school systems was formed in a relatively
short time period, primarily during the latter part of the nineteenth and early

part of the twentieth century.
American schools began as local entities, largely private and religious during the seventeenth, eighteenth, and even early nineteenth centuries. As in