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Concepts of School Finance Equity: 1970 to the Present

Robert Berne and Leanna Stiefel

Introduction

The idea of "America as a land of opportunity" captures an essential part of our national spirit and heritage, and public education is often viewed as the institution that can transform that idea into a reality. Thus, to many, an equitable system of education is one that offsets those accidents of birth that would otherwise keep some children from having an opportunity to function fully in the economic and political life of the community.

The idea of providing opportunity by using education as a vehicle has occupied social scientists and educational policymakers throughout the twentieth century, with the work of Ellwood P. Cubberley often cited as the first to link the method of finance with the fairness of the education system (Guthrie et al., 1988:133). Early school finance work focused on the resources available to children (inputs), although the authors of this work implicitly assumed that equalizing resources would also equalize performance and life outcomes. We now know that the linkages between inputs and outputs are complicated. While a common statement among experts in education is that changing resource allocation can lead to improvements in outputs if schools use their funds productively, the enormous literature on education production functions is not conclusive about which specific resources, under which particular circumstances, will affect outputs and outcomes (Hanushek, 1986; Ferguson and Ladd, 1996; Mosteller et al., 1996). 1

In addition to conceptual issues about the extent to which finance inputs are related to improving performance, fairness in financing also runs headlong into



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7 ROBERT BERNE AND LEANNA STIEFEL 1 Concepts of School Finance Equity: 1970 to the Present Robert Berne and Leanna Stiefel INTRODUCTION The idea of “America as a land of opportunity” captures an essential part of our national spirit and heritage, and public education is often viewed as the institution that can transform that idea into a reality. Thus, to many, an equitable system of education is one that offsets those accidents of birth that would other- wise keep some children from having an opportunity to function fully in the economic and political life of the community. The idea of providing opportunity by using education as a vehicle has occu- pied social scientists and educational policy makers throughout the twentieth century, with the work of Ellwood P. Cubberley often cited as the first to link the method of finance with the fairness of the education system (Guthrie et al., 1988:133). Early school finance work focused on the resources available to children (inputs), although the authors of this work implicitly assumed that equal- izing resources would also equalize performance and life outcomes. We now know that the linkages between inputs and outputs are complicated. While a common statement among experts in education is that changing resource alloca- tion can lead to improvements in outputs if schools use their funds productively, the enormous literature on education production functions is not conclusive about which specific resources, under which particular circumstances, will affect out- puts and outcomes (Hanushek, 1986; Ferguson and Ladd, 1996; Mosteller et al., 1996).1 In addition to conceptual issues about the extent to which finance inputs are related to improving performance, fairness in financing also runs headlong into 7

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8 CONCEPTS OF SCHOOL FINANCE EQUITY the particular American way of funding and delivering public primary and sec- ondary education. All 50 states create public school systems that are generally organized into local school districts and rely heavily on financing from local property taxes. Property taxes in turn are based on property values that are unequally distributed across school districts and across states. Beginning at the turn of the century, the traditional policy response to inequities caused by unequal property tax bases has been to restructure state financing systems to mitigate the disequalizing effects within states while still maintaining the 50-state system. Several key realities describe the challenge faced by Americans as they strive to provide opportunity through public education, all within the context of a federal system of state and local control. First, a well-accepted equity concept such as equal opportunity includes many specific, different definitions. Some of these differences, especially more recent ones, have their origin in whether stu- dent performance or resource access is the ultimate goal of a finance system. The different definitions then lead to different opinions among legislators, lawyers, advocates, and the public about specific goals they are trying to achieve. Second, unlike most other countries, in the United States the federal government provides a relatively small share of public primary and secondary education funding, around 7 percent. State and local governments share roughly equally the remain- ing 93 percent. Third, the reliance on individual states means that there are actually 50 separate and different public education systems with substantial varia- tion in finance, governance, and instruction. Fourth, equity in education has been affected by litigation and court decisions, not at the federal level for broad-based equity concerns, but instead at the state level, largely based on state constitutions. Fifth, the popular press and journalists are active participants in the discourse about education equity.2 While these factors have influenced school finance over the past century, the most recent changes since 1970 have been dramatic and important. The 1970s mark the beginning of a significant period to examine school finance equity, comparable to other times when major events changed the direc- tion of K-12 finance legislation or law.3 The early 1970s were watershed years, most dramatically marked by the California Supreme Court’s decision against the state in Serrano v. Priest I. This landmark case declared that “the quality of education may not be a function of wealth other than the wealth of the state as a whole” and ushered in a series of court cases, academic studies, and legislative changes focused on the equity of state school financing systems (Guthrie et al., 1988:201). This chapter provides a framework for other chapters in this volume written on more specific topics, such as the effects on school finance equity of litigation, politics, legislation, and new concepts such as adequacy. This chapter begins with an analysis of the development of major concepts of school finance equity from 1970 to the present, including definitions of each concept. Subsequent sections describe how the concepts have been shaped over time by the courts,

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9 ROBERT BERNE AND LEANNA STIEFEL research, legislation, data availability, and school reform, and analyze five differ- ent concepts of school finance equity that have been prominent since the 1970s. Finally, we conclude with thoughts about the relevance of the concepts to today’s challenges in school finance. DISTINCTIONS IMPLICIT IN ANALYZING SCHOOL FINANCE EQUITY Above all, the idea of equity involves value judgments about how to deter- mine fairness in the financing of K-12 education. As such, there are many different ways to approach a definition of equity. During the last quarter century, as ideas about equity have evolved, several important distinctions have been made. In some cases, these distinctions have emerged as part of the judicial or advocacy processes that have played such an important role in school finance equity since 1970. In order to facilitate the presentation in this chapter, we first identify and define these distinctions. Although not every distinction is important to every concept of equity, different combinations apply to each and we discuss the distinctions in enough detail to be able to use them in the sections on equity concepts.4 The distinctions characterize differences among equity concepts as applied to school finance systems. A school finance system is a set of formulas and rules for using publicly collected revenues to pay for K-12 education.5 In the United States, each state is responsible for K-12 education within its borders and thus the school finance system is established in state law, often supplemented by state department of education regulations. Revenues to finance K-12 education come almost equally from state and local sources (about 93 percent of the total) and only in a small percentage from federal sources (about 7 percent of the total). State revenues are derived from each state’s general tax and other revenues, consisting in most states primarily of sales and income taxes. Local revenues are derived mostly from property taxes and, to a lesser extent, from local sales and income taxes. States usually delegate responsibility for provision of K-12 educa- tion to local school districts and then design complex formulas to govern how state funds will be distributed to those districts. A general formula often applies to all students, with varying numbers of special formulas for different types of students (e.g., at-risk, gifted, handicapped), for specific types of spending (e.g., transportation, buildings), and for differences among districts in costs and size. In addition, state legislators often design some of the formulas to provide more money to poorer districts and/or to match local spending more generously for poorer districts. The federal government’s aid to states and local school districts is almost entirely for special needs students such as economically disadvantaged or at-risk (Title I) or disabled (P.L. 94-142). Once the formulas are in place, school districts “respond” to them by decid-

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10 CONCEPTS OF SCHOOL FINANCE EQUITY ing how much to spend per pupil. Increasingly over the last 30 years, voters in states have placed limits on how much can be spent from local sources and sometimes state sources as well. With this background in mind, we describe distinctions important to analyses of the equity of school finance systems.6 Child Versus Taxpayer Perspectives When equity is approached out of a concern for opportunity, in many people’s minds the child or student perspective is paramount. Thus, school-age children are most often the subject of an equity definition in school finance. Because we are discussing the financing of education with public funds, however, taxpayers are sometimes brought into definitions along with the children. Occasionally, the interests of both groups are served simultaneously in the same definition. When children are the subject of equity definitions, differences among the children, such as whether they speak English as a second language, are mildly or severely handicapped, have learning disabilities, or are poor or minority, become important. Resources made available to different groups of children are often the principal concern of equity discussions, sometimes with the emphasis on fairness of access, but increasingly with an eye toward how differing resources relate to the costs of bringing each group of children to an acceptable (or adequate) perfor- mance level. The school finance and public finance conceptions of taxpayer equity do not always conform to one another. From a school finance perspective, a system would be judged fair to taxpayers if every taxpayer was assured that a given tax rate would translate into the same amount of spending per pupil regardless of where the taxpayer lived. From a public finance perspective, on the other hand, a system would be judged fair to taxpayers on the basis of either the ability to pay or the benefit principle. The ability to pay principle enables one to judge how fairly tax burdens change as ability to pay changes.7 Tax burdens are defined as reductions in welfare, usually measured by changes in income, and ability to pay is usually measured by annual or average lifetime income. Thus, while school finance taxpayer equity compares tax rates to spending per child, public finance taxpayer equity compares tax burdens to ability to pay.8 The benefit principle states that, where possible, taxation should relate to the value of the services that the tax provides. This idea can only apply when a direct relationship exists between a particular tax and a service (e.g., tolls and highway maintenance) and when the service does not involve a significant public goods aspects. While some have tried to link local property taxation and K-12 educa- tion in this way, it is difficult to do in states that finance large shares of K-12 education through general state taxes. In general, neither the courts nor advocates nor researchers in school finance have focused on the public finance concepts of equity; rather, they have based taxpayer equity on the idea of fairness of tax rates faced by or effort exerted by

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11 ROBERT BERNE AND LEANNA STIEFEL districts. Some exceptions to this are the occasional discussion of whether com- mercial or utility property should be made a statewide asset for school finance purposes or whether a major change in the school finance system will result in such large changes in residential property values as to undo the intended direction of equity (i.e., will changes be capitalized into property values in ways that make unclear the direction of change for taxpayers’ real tax burdens?). But aside from these occasional discussions of commercial property or capitalization, the vast majority of school finance work on taxpayer equity has not used public finance ideas.9 The Unit of Analysis States, districts, schools, and students grouped by socioeconomic or other characteristics have all been used as units of analysis in school finance equity analyses. The federal government and analysts have often compared and ranked states according to their school finance equity. Common questions using the state as the unit of analysis are (1) Is state A more equitable than state B? and (2) Has equity improved in state C? For any given state, the unit in most instances is the district because the financing and provision of public education are carried out largely through local school districts. Within districts, schools have been impor- tant in two court cases and, in urban districts with large numbers of schools, researchers and policy makers are increasingly interested in intra-district equity. In addition, the school reform movement that emphasizes school-based decision making, including budgetary decisions, potentially elevates the school to a posi- tion of particular interest.10 Although the individual student is rarely the unit of analysis, groups of students (e.g., poor versus rich, minority versus non-minority, handicapped versus non-handicapped) have been used in some analyses. The unit of analysis issue is often resolved with at least one eye on data availability and another on the politics of school finance, the latter focusing on where the power to change lies, which is often with the state or district. Political issues involved in equity of school financing are discussed by Carr and Fuhrman (Chap- ter 5 of this volume). Inputs, Processes, Outputs, and Outcomes One way to understand different approaches to school finance equity is to examine the varying emphases on different stages in the “production” of educa- tion. Some definitions of equity focus on inputs—labor, equipment, capital—in their dollar or raw unit forms. That is, the ideal is to have these inputs distributed equitably, which is not necessarily equally. Sometimes the discussion ends here with an assertion that it is inputs, measured in dollars, that should be the focus of school finance equity. In other cases the idea of equity goes beyond inputs to something further along in the education production process. For example, con-

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12 CONCEPTS OF SCHOOL FINANCE EQUITY cern about issues such as what occurs in the classroom, what courses students take, or educational tracking can be seen as a focus on equitable processes. More recently, attention is turning to outputs (e.g., what schools produce, such as types of achievement and graduates) and outcomes (e.g., lifetime accom- plishments, such as earnings or health status) that are variously related to what schools do. This output focus is consistent with the attention paid over the past 15 years to the quality of the U.S. education system in general and in comparison with other nations. Focusing on output equity invariably leads to questions about what levels and uses of inputs and processes are required to achieve desired distributions or levels of outputs. As we will discuss later in the chapter, these distinctions begin to hint at how the concepts of equity and adequacy interact.11 Of course, specifying how processes relate to outputs within a school is very difficult, both because of variations in factors outside the school environment as well as uncertainties about the ways in which dollars and resources are currently used or could be used more effectively within schools. Chapter 4 of this volume, by Goertz and Natriello, explores some of these issues by reviewing what is known about the patterns of personnel usage and service provision that result from school finance reforms. Guthrie and Rothstein (see Chapter 7 in this vol- ume), Duncombe and Yinger (see Chapter 8 in this volume), and Minorini and Sugarman (see Chapter 6 in this volume) explore ideas of adequacy and its relationship to inputs, outputs, and processes. Alternative Groups of Special Interest The connections between education equity and opportunity have oriented the discourse around those who are most in need of enhanced opportunities. Low- income, minority, and disabled students are often the most targeted groups in this context, and the same general focus has been applied to low-wealth or low- income taxpayers. Many court cases since the 1970s have focused on property- poor school districts. This latter emphasis has proved problematic in some in- stances because the correlation between poor districts and poor children is not high. The chapter on equity by Minorini and Sugarman (Chapter 2 of this vol- ume) discusses this issue when it addresses the United States Supreme Court’s consideration of school finance. Ex Ante Versus Ex Post Concepts Ex ante concepts outline the conditions for equity in the statutory formulas of K-12 financing systems. Ex ante concepts analyze the equity of statutory design elements such as the way a formula provides aid for poor versus rich districts or the way a formula is designed to provide additional funding for at-risk students. Ex post concepts are used to analyze actual outcomes that result from behavioral changes of school districts as they respond to the design elements of a school

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13 ROBERT BERNE AND LEANNA STIEFEL finance system. These observed outcomes may or may not differ from the in- tended, ex ante ones. For example, legislators might design a school finance formula that matches spending in a property-poor local school district at some multiple of the matching rate of a property-rich local district. Such a formula would have elements of ex ante equity with respect to property-poor and -rich districts. Ex post, however, as property-poor school districts respond to the matching rate, they might or might not spend equally per child compared to property-rich districts. For example, property poor districts might spend less per child for any number of reasons, including that the matching rate was not high enough or that other factors (e.g., tastes or income levels of residents) were working in the direction of lower per pupil spending. Ex post concepts in school finance equity are often measured using statistical analyses of actual data. In some cases ambiguity is introduced because the conceptual approach is ex ante while the empirical measurement is ex post. Chapter 3 of this volume, by Evans, Murray, and Schwab, explores ex post results by reviewing studies of the impact of reform of school finance systems on aggre- gate and average spending as well as on spending and input disparities. EQUAL OPPORTUNITY The idea that public policy can be designed to improve or equalize the opportunity for some Americans, coupled with the belief in education as one of the most effective institutions in this regard, makes the concept of equal opportu- nity the logical place to start a discussion of equity concepts. But while it may be the right starting point and the most widely held value, our review of the history of concepts of school finance equity since 1970 suggests that it is perhaps among the more ambiguous concepts of equity. In positive terms, the general idea of equal opportunity is that all students should have an equal chance to succeed, with actual observed success dependent on certain personal characteristics, such as motivation, desire, effort, and to some extent ability. In negative terms, the idea of equal opportunity is that success should not depend on circumstances outside the control of the child, such as the financial position of the family, geographic location, ethnic or racial identity, gender, and disability. “Success” has been defined in many different ways, including ability to obtain resources (often measured in dollars) while in school, access to high-level curricular offerings, achievement on tests, and accomplish- ments in life. Equal opportunity is defined both ex ante and ex post. The ex ante idea is that education should provide access to opportunity or a fair starting line, espe- cially for students who are poor, minority, female, or disabled. An ex ante question to be answered in order for equal opportunity to be achieved is: Are the conditions set up to allow the possibility for all to “succeed”? Equal opportunity is harder to define ex post than ex ante because the ex ante

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14 CONCEPTS OF SCHOOL FINANCE EQUITY definitions can be general while the ex post ones must be specific in order to give exact guidance to empirical work.12 One common ex post conceptualization of equal opportunity assesses whether low-income and high-income pupils (or other groups) have the same access to the education system, in terms of inputs (e.g., dollars of expenditures), processes (e.g., advanced placement classes), or outputs (e.g., high achievement levels). There is some evidence that school finance equity concerns regarding equal opportunity are moving farther along the pro- duction process continuum, with output analyses appearing with greater fre- quency. Another explicitly ex post equal opportunity equity definition in school fi- nance focuses on the relationship between education available to students and the property wealth (or fiscal capacity) of their school district. This idea is so promi- nent in earlier court cases and legislation that it has a name of its own—wealth (or fiscal) neutrality. In Chapter 2 of this volume, Minorini and Sugarman summarize equity litigation using the wealth neutrality concept. Part of the ambiguity in the concept of equal opportunity is the intermingling of educational and legal concepts within the courts. Equal educational opportu- nity is an educational concept, while the similar idea of equal protection is a legal concept that extends to a wide array of public services. It is possible that efforts to move the legal concepts of equal protection, and now adequacy, further into educational outcomes and processes (as opposed to just inputs) will encourage the courts to address, with more specificity, the types of curriculum, program, teacher quality, or technology that constitute “equal educational opportunity” or “an adequate education.”13 The equal opportunity concept is much broader in application to education than in school finance issues per se. School finance equity has stressed one particular formulation of equal opportunity—wealth neutrality—which we ex- plore more fully in the next section of the chapter. Nevertheless, some of the more general thinking about equal opportunity in education has been influential in the school finance area. One court case and three early books have been particularly influential. Brown v. Board of Education (1954) riveted the nation’s attention to inequality in educational opportunity, focusing on inequalities due to differences in racial composition of schools. Although the Supreme Court did not tie its findings in the Brown case to financing of schools, the subsequent remedies to the findings involved additional financial resources, which quickly affected school finance. Arthur Wise (1968) and more recently Peter Enrich (1995) cite the theme of race in the Brown decision as one of three particular themes in court cases that are important historically to the evolution of legal ideas about school finance equity.14 Equality of Educational Opportunity (Coleman et al., 1966), written for the U.S. Office of Education to fulfill a legislative mandate of the 1964 Civil Rights Act, surveyed principals and teachers about students and schools in an effort to understand variations in school resources as well as their effects on student

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15 ROBERT BERNE AND LEANNA STIEFEL achievement. Its conclusions, the most controversial of which indicated that students’ family and other background characteristics were more important than school resources in determining school achievement, set off an academic and public debate that continues today.15 Production functions relating inputs to outputs have been reestimated using alternative units of analysis, measures of inputs, outputs, controls, and functional forms. The continuing lack of consensus among social science researchers about “whether money matters” has influenced the development of concepts of school finance equity. With the controversy over how outputs are influenced by increasing resources for schools, litigators appear to be reluctant to argue too strenuously for output or outcome equity and perhaps, until recently, academics are also reluctant to try harder to measure output equity. The area of school finance equity is truly one where the major actors (courts, legislators, academics, and the public) are influenced by one another’s work. Christopher Jencks and co-authors followed Coleman et al. with a major collaborative study, culminating in the publication of Inequality (1972). Inequality’s most broad finding was that reducing disparity in income among adults was most effectively brought about by attacking the problem head-on rather than by trying to change personal characteristics, such as education levels. Income redistribution programs (including more progressive taxation systems) would work better than changing inequality in education services. The last paragraph of Who Gets Ahead (Jencks et al., 1979) makes the same point: “But Inequality also argued that past efforts at equalizing the personal characteristics known to affect income had been relatively ineffective. This assertion, sad to say, remains as true as ever. Thus, if we want to redistribute income, the most effective strategy is probably still to redistribute income” (1979:307). Jencks et al.’s conclusions about education’s effect on the broader social goal of income equality were even more pessimistic than the Coleman Report conclusions. The latter emphasized that individual characteristics, not school resources, were the primary determinants of one type of schooling success. Jencks et al. went further to say that making education more equal would not make incomes more equal.16 The work of Coleman et al. and of Jencks et al. occurred at the beginning of a long line of research on education production functions and in the middle of a body of work on investment in human capital, both of which continue today (Burtless, 1996). These works of the 1960s and 1970s that questioned the link between resources and effects in education may have had a very particular influ- ence on the development of school finance equity concepts by convincing those working with school finance equity to stick more closely to inputs and processes, waiting for more definitive, less controversial findings on the link to outputs before using output concepts. More recent work is indeed beginning to challenge the findings of the 1960s. For example, Ferguson and Ladd (1996) argue that inadequate measures of resources may have influenced earlier findings and their work provides an example of how more meticulous measures of inputs can lead

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16 CONCEPTS OF SCHOOL FINANCE EQUITY to findings of positive effects of resources on outputs. As we will discuss below, several other factors have contributed recently to an evolution of school finance concepts away from an exclusive focus on inputs. Arthur Wise’s Rich Schools, Poor Schools: The Promise of Equal Educa- tional Opportunity (1968), based on his doctoral dissertation at the University of Chicago, was more directly targeted to equity in the financing of schools than were the works of Coleman et al. and Jencks et al., and as such it had a more immediate impact on the development of school finance equity concepts. His purpose, in his own words, was “to determine whether the absence of equal educational opportunity within a state, as evidenced by unequal per-pupil expen- ditures, may constitute a denial by the state of the equal protection of its laws” (1968:4). Wise began his thinking on this issue in the mid-1960s, and a large number of his ideas found their way into early court cases. For example, his theoretical standard became a central argument in Serrano-type cases: “the qual- ity of a child’s education in the public schools of a state should not depend upon where he happens to live or the wealth of his local community” (1968:xi). While Wise’s in-depth analyses of possible legal arguments applying the equality of educational opportunity concept to school finance were highly influ- ential in the 1970s, his analyses also raised many of the issues we still wrestle with today. For example, he explored the meaning of the Coleman Report’s results and concluded that “nonetheless, even in the absence of a demonstrated relationship between inputs and outputs, the burden remains of defending the current variation in educational spending” (Wise, 1968:141). He explored 10 alternative definitions of equal educational opportunity, many of which we still use. Most prescient is his minimum-attainment definition, which reads quite like the contemporary definitions of adequacy: “the minimum-attainment definition of equality of educational opportunity asserts that resources shall be allocated to every student until he reaches a specified level of achievement” (Wise, 1968:151). The number of direct quotations from Wise in the last two paragraphs shows how he both influenced and foresaw much of the evolution and debate about school finance equity. His major contribution, however, lies with application of the equal opportunity concept to school finance in the law and especially his development of the wealth neutrality concept. WEALTH NEUTRALITY Wealth neutrality as a school finance equity concept specifies that no rela- tionship should exist between the education of children and the property wealth (or other fiscal capacity) that supports the public funding of that education. Al- ternatively, it specifies that taxpayers should be taxed at equal rates to fund equal education per child (generally defined as equal spending per child). Wealth neutrality has been formulated both ex ante and ex post. The idea argued in the Serrano court cases, that no child’s education should depend on the

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17 ROBERT BERNE AND LEANNA STIEFEL wealth of his neighbors, can be thought of as an ex ante idea.17 It led to the formulation of the guaranteed tax base (GTB) formula for distributing state aid to school districts, which, in its pure form, is constructed so that districts that levy the same tax rates will spend the same amount of money per pupil.18 GTB has also been used as a way to achieve ex ante taxpayer equity based on the idea that potential tax rate equity is a good measure of taxpayer equity.19 A large amount of school finance research as well as legislative and court activity has focused on the ex post definitions of wealth neutrality. Ex post analysts look for statistical relationships (associations) between education, usu- ally measured in dollars, and school district wealth. They ask whether or not there is an actual association between educational inputs and ability to pay. Much of the earlier work focused on district-level inputs (per-pupil dollars or per- pupil resources, such as staff or teachers) and per-pupil property wealth. The unit of analysis for wealth neutrality has been the state and its districts. It is not a relevant concept at the school level because schools do not have the authority to levy taxes, but rather districts and/or states levy taxes for the schools within them.20 At the beginning of the period, the focus was on inputs; now, in addition, users are interested in outputs and outcomes. In Private Wealth and Public Education (1970), Coons et al. set the stage for court and legislative activity in the 1970s in three ways: by establishing an ex ante principle that could be used to argue for judicial intervention on the basis of the Fourteenth Amendment (or its state constitutional versions), by demonstrat- ing that the specifics of current state financing systems violated the principle both ex ante and ex post, and by proposing a new system that would remedy the problem. Their ex ante principle was that a child’s education should not depend on his neighbor’s wealth, and their analyses showed that current financing sys- tems did not prevent such dependence. They proposed the district power equal- izing finance formula (DPE, also known as guaranteed tax base or GTB) as a way to make a child’s education depend on local effort not wealth. Explicit in their work was an emphasis on inputs21 and a remedy that preserved local choice.22 Trite but true, the rest is history. Private Wealth and Public Education wrote the script for Serrano and many cases that followed, such as Levittown (1982) and Abbott v. Burke (1985).23 It also stimulated analytical, legislative, and legal work. Martin Feldstein (1975) showed that the power-equalizing formula does not in theory sever the relationship between a community’s expenditures per pupil and its wealth per pupil. School districts make decisions about spending per pupil based on their local tax price, income levels of residents, and other taste and socioeconomic factors. Feldstein demonstrated that district power equaliz- ing does not correctly offset the effects of DPE’s tax price and other wealth- related factors and, therefore, districts do not respond in ways that break the positive wealth-spending relationship.24 Berne and Stiefel’s The Measurement of Equity in School Finance (1984) presented a variety of ex post measures of wealth neutrality, including correla-

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23 ROBERT BERNE AND LEANNA STIEFEL been conceived historically is adequacy’s emphasis on outputs. The definition of adequacy begins with the idea of adequate performance by students, which re- quires specifications of performance in various kinds of output dimensions. But we believe that it is conceptually most useful to maintain the distinction between absolute levels (adequacy) and relative distributions of levels (equity). It is entirely possible for inputs, outputs, and outcomes to be equitable or inequitable, and it is possible for inputs, outputs, and outcomes to be adequate and inadequate. Lawyers and judges have used the adequacy concept to apply to all districts in some cases (e.g., Kentucky, Massachusetts) and to poor, urban districts in others (e.g., New Jersey). William Clune is the most prominent advocate of using the idea to apply, in particular, to urban, poor districts.34 His writing on the topic has evolved from a description of adequacy that includes all children to one that targets poor children. He has even ventured a rough guestimate of the cost of adequate education in high-poverty schools: “the national average spending is about $5,000 per pupil, and the total adequacy package is about $5,000 per pupil above the typical budget of a high-poverty school, suggesting a total budget of $10,000 per pupil per year” (1993:391). In a volume of the University of Michigan Journal of Law Reform, edited by Clune (1995b), several lawyers looked at applications of adequacy in three states—Alabama, Oklahoma, and Kentucky (Morgan et al., 1995; Grossman 1995; Trimble and Forsaith, 1995). Julie Underwood, in the same volume, inter- prets adequacy as a form of vertical equity, which is an interesting way to link the previous equity work with the current legal concept of adequacy: “adequacy from the perspective of ‘vertical equity,’ meaning that different students should be treated differently based on their special educational needs” (1995:493). Clune’s definition, when targeted to high-poverty students, could be interpreted as a form of output vertical equity where differences among students are based on their family income. Robert Berne’s article, in the volume he co-edited on Outcome Equity in Education (1994), illustrates how outputs are related to poverty (and race) in one of the largest states. This article has been used as “evidence” by some for the need for adequacy-driven reform. Legislators have also begun to use the concept of adequacy as they consider remedies, even in cases where the court’s decision involved equity.35 Clune has outlined a research agenda that would help implement the adequacy concept (Clune, 1997), and some ongoing research on production functions and educa- tional evaluation research of programs, such as Accelerated Schools and Success for All, is helpful to his framework, although not necessarily carried out with adequacy in mind. Clune and others say that adequacy is a different concept from equity be- cause it changes the focus from inputs to outputs and because it leaves behind the idea of equal resources for all. As we note above, in a broader view of equity, neither of these distinctions is essential, since outputs and outcomes can be ac-

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24 CONCEPTS OF SCHOOL FINANCE EQUITY commodated in equity concepts and because fiscal neutrality, vertical equity, and equal opportunity concepts of school finance equity do not require equal inputs or resources per pupil. The use of minimum, albeit high levels of outputs, rather than the use of the idea of relative levels (distributions) of outputs, does help distinguish adequacy from equity. Whether people would be content to see vast disparities in educational outcomes, once adequacy was achieved, is a matter of speculation. And certainly one can think of equitable situations (condensed distributions) that are inadequate. Perhaps California or some of the low-spend- ing and low-achieving Southern states fall into this latter category. SCHOOL FINANCE EQUITY AS WE ENTER THE TWENTY-FIRST CENTURY Equity is a concept that is steeped in values and requires conceptual clarity to avoid spinning conceptual and empirical wheels and talking past one another. Our review of school finance equity concepts since 1970 suggests that several ideas seem to be reasonably well accepted among researchers, lawyers, and policymakers. First, there are alternative concepts of equity, and no single con- cept serves the purposes of all users, in part because people have different values and in part because people use the concepts for different purposes (to argue court cases, to design school finance systems, etc.). Second, children and taxpayers each have a legitimate perspective from which to view equity. Third, we should continue to examine inputs even as we move to using concepts of output equity because many users (e.g., lawyers, the public) find input equity meaningful. And, fourth, given the American structure of primary and secondary education, states and school districts are important units of analysis. Moreover, several recent trends are apparent. First, analysts are paying greater attention to outputs throughout the broader field of educational policy, and this attention can be seen in school finance equity discussions. Second, while the school district remains an important unit of analysis, the school is increas- ingly used as well, especially in areas such as governance, accountability, and finance, that involve large, urban school districts. Decentralization, site-based decision making, and school-based budgeting all foster a focus on the school rather than exclusive attention on the district. Third, policy makers and lawyers now frequently use concepts of adequacy. Fourth, the courts continue to be used to achieve change that is not possible through the political process and in the state legislatures. And, fifth, more detailed data bases permit greater differentiation of pupil characteristics and funding streams, and this leads to greater use of vertical equity, rather than the traditional reliance on horizontal equity alone. The fifth point, which involves data availability and conceptual measure- ment, deserves particular attention. Throughout the past 25 years, data availabil- ity has been an important factor in determining how school finance equity con- cepts and even court case remedies are formulated. For example, in the 1970s,

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25 ROBERT BERNE AND LEANNA STIEFEL many states were reluctant to measure within-state, intra-district, horizontal eq- uity because of the incompatibility of how expenditures, revenues, and pupils were counted. Researchers pushed ahead with data that were available and now the Department of Education produces data with standard definitions for all states (Common Core of Data from the National Center for Education Statistics). Like- wise, the relationships between financing inputs and student performance have both driven and been driven by the kinds of data available. Twenty years ago, most researchers could access cross-section, district-level data, with very imper- fectly measured inputs. Currently, the federal government sponsors several stu- dent-level surveys that follow students over several years (e.g., High School and Beyond and the National Education Longitudinal Study). In addition, many states collect and use student-level data for their performance systems. These student-level data allow researchers interested in production functions to refine their approaches. Remedies to court cases 25 years ago focused little on student performance, but as states have begun to produce numerous measures of perfor- mance by district (and often by school), these measures have been picked up by lawyers to help define and monitor adequacy of school finance systems. The importance of education to Americans, the large percentage of government ex- penditures devoted to it, and the constant attention of researchers, legislators, and lawyers have created pressures on state education departments and federal de- partments to provide better data. Whatever the direction of causality, it seems true that measures of school finance equity are intimately intertwined with the data that can be accessed by analysts. If equity remains an important value, and adequacy continues to grow in its importance, then the research that links inputs to outputs will remain at the center of debates over school finance equity. Individual studies confirm that under some circumstances resources affect outcomes (Ferguson and Ladd, 1996; Mosteller et al., 1996; Krueger, 1997). If that research, combined with the extensive literature that already exists on the subject, can be interpreted to mean that when resources are used well they affect outcomes and when they are used poorly they do not, then we have a strong incentive to understand when effective use occurs. Although it is reasonably safe to maintain that the financing of primary and secondary education in America will remain public, we can be less sure about the constancy of public provision in the traditional form of public schools organized in local school districts. Various changes that are being debated today, such as voucher schemes and charter schools, may lead to significant structural changes. How concepts of equity that developed within the framework of the traditional school district and public school will or will not fit with these newer arrange- ments remains to be seen. In some ways, we have come full circle to the problems and issues that were addressed three decades ago. Whether we look across states, within states across districts, within districts across schools, or within schools across groups of stu-

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26 CONCEPTS OF SCHOOL FINANCE EQUITY dents, it is hard to argue that we have achieved equity in education or in the larger American society. Wide differences in property bases still persist and often lead to inequities in finance; educational outputs and lifetime outcomes are still highly related to socioeconomic status, race, ethnicity, and gender; and inequality in income and wealth continues at high levels. In addition, there are serious and widespread concerns that schools are not meeting society’s needs for an educated workforce and citizenry as we enter the next century. Concepts of equity are likely to be at the center of these issues that, unfortunately, do not appear to be close to resolution. NOTES 1. Review of the education production function literature is outside the domain of this chapter. 2. Jonathon Kozol’s (1991) book about education was a best-seller. The New York Times devoted a week’s worth of articles (e.g., Hartocollis, 1997) to the controversy stirred up by parental donations for a teacher’s salary at a local public school and the debate about whether the practice was fair to other schools with less affluent parents. The event made national news as well. 3. Other significant years in the history of K-12 education equity policy and law are 1923 (publication of Strayer and Haig’s foundation plan for school finance), 1954 (Brown v. Board of Education Supreme Court decision), 1965 (passage of the federal Elementary and Secondary Education Act [ESEA] with Title I funding for poor children), and 1975 (passage of the federal Education for All Handicapped Children Act, P.L. 94-142). 4. In previous work (Berne and Stiefel, 1984), we develop a series of ques- tions that highlight the values inherent in equity concepts. These questions, briefly, are who, what, how, and how much. “Who” asks which groups are the focus of the equity concept. The usual two choices are children and taxpayers. “What” asks what objects will be used in the analysis, the choices being inputs (dollars and/or real resources), processes, outputs, or outcomes. “How” identi- fies the equity concept, which can include horizontal equity, vertical equity, and equal opportunity. “How much” focuses on the statistical measure used to quan- tify the other choices. We identify a large number of measures and specify the values inherent in choosing each of them. One of the questions (How?) involves choosing a concept. In this chapter, we put the emphasis on the concepts them- selves and broaden the discussion to include other authors who have taken dif- ferent cuts at equity ideas. Although decisions involving values must be made about all four questions, the broader community of scholars and the public think first of the concept. Thus the emphasis here is on concepts. 5. See Gold et al. (1995) for detailed descriptions of each state’s school finance system and Odden and Picus (1992: Chapters 7 and 8) for a more techni- cal explanation of alternative finance formulas.

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27 ROBERT BERNE AND LEANNA STIEFEL 6. See Berne and Stiefel (1979) for more detail on how to apply equity concepts to state finance plans. 7. Generally this is done by calculating tax burdens as a percentage of ability to pay, although researchers have also used other measures such as re- gression coefficients relating burden to ability to pay or Gini type coefficients. 8. Economists use three alternative concepts of incidence or burden—ab- solute, balanced budget, and differential. We are discussing absolute burden here. See Rosen (1992:277) for the differences among the three alternatives. 9. If the courts or legislatures used public finance ideas, the remedies pro- posed or legislated for taxpayers would be quite different. Equal tax rates for equal spending (a school finance principle) does not translate into particular patterns of public finance incidence such as progressive, regressive, or propor- tional tax burden, and each proposed school finance formula would have to be studied from the public finance viewpoint. Such linkages of school finance eq- uity to public finance equity are beyond the scope of this chapter. 10. Advocates of school-based budgeting have suggested that states fund schools directly rather than through the intermediary of districts. Some charter school funding works this way. 11. Kenneth Strike argues that the shift to outputs, combined with research findings that much of the variation in outputs is due to factors outside the school environment, results in an equity concept that is built on the schools compensat- ing for outside-the-school factors in order to reach adequacy. (See Strike, 1988, and personal communication.) 12. For example, Coleman et al. defined five alternative ways to measure equal opportunity in his Equality of Educational Opportunity report (Coleman et al., 1966). They note that “as a consequence, in planning the survey it was obvious that no single concept of equality of educational opportunity existed and that the survey must give information relevant to a variety of concepts” (Coleman, 1968:16-17). This chapter is a review of school finance equity since 1970. Our objective is not to define or redefine equal opportunity, but to analyze what others have written. 13. We thank an anonymous reviewer for this idea. 14. The other two themes cited by both Wise and Enrich as important his- torically are wealth in criminal justice rights cases (the indigent criminal) and mathematically equivalent treatment in legislative reapportionment cases (voter equality). 15. One of the most famous and controversial findings of the report was “. . . that schools bring little influence to bear on a child’s achievement that is independent of his background and general social context; and that this very lack of an independent effect means that the inequalities imposed on children by their home, neighborhood, and peer environment are carried along to become the inequalities with which they confront adult life at the end of school” (Coleman et al., 1966:325).

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28 CONCEPTS OF SCHOOL FINANCE EQUITY 16. Christopher Jencks, in a personal communication, now believes there is evidence to support the view that education can change outcomes for disadvan- taged students; see also Jencks and Phillips (1998). 17. When it comes to empirical measurement in Serrano litigation, ex post measurement is common. 18. It can be mathematically equivalent to a percentage equalizing funding system, which had existed before in impure forms in states such as New York, for example, but GTB was seen as new in the 1970s. 19. As this paragraph implies, wealth neutrality is both a child and taxpayer concept. It began with the child in Coons et al. (1970), but developed to include taxpayers as well. Sometimes it seems to be aimed at both at the same time. For the child, analysts look at the relationship of the child’s education to the wealth of the school district. For the taxpayer, the concept specifies equal tax rates for equal spending per pupil. 20. The concept could be reconstrued to apply to schools if family income of students attending the schools were substituted for community property wealth. 21. Coons et al. (1970:25): “Having chosen the objective standard, the mea- sure of quality becomes not what is achieved but what is available. . . . What is available becomes whatever goods and services are purchased by school districts to perform their task of education. Quality is the sum of district expenditures per pupil; quality is money.” 22. Coons et al. (1970:xxii): “We have a strong preference, and that prefer- ence is for balance . . . we find equally offensive the current efforts to use the Constitution as a battering ram for uniformity or even for compensatory educa- tion. There are less polarized and destructive ways to approach the problem of fiscal equity through the courts.” 23. See Sugarman and Minorini in Chapter 2 of this volume for more detail on the court cases based on the principle of wealth neutrality. 24. In fact, using empirical estimates from the then-existing Massachusetts’s education finance system, Feldstein showed that: “the estimated elasticities there- fore indicate that the widely advocated district power equalizing form of per- centage equalization grant, which has a price-wealth elasticity of 1, would not be wealth neutralizing but is more likely to result instead in an inverse relation between local wealth and local educational spending” (Feldstein, 1975:88). 25. See the Journal of Education Finance in the years after 1984 for empiri- cal studies of ex post wealth neutrality (for example, Kearney et al., 1990; Sample and Hartman, 1990; and Johnson and Pillainayagam, 1991). 26. The authors of the GAO report devised a new measure, “the implied foundation level” to quantify the degree of fiscal neutrality in a site. This mea- sure simulated the minimum total funding per pupil each state could support for all its school districts, assuming all districts were taxed at the same tax rate, that the state share of funding remained constant, and that total state plus local spend- ing remained constant. The report uses per-capita income as a measure of fiscal

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29 ROBERT BERNE AND LEANNA STIEFEL capacity because of the lack of property wealth numbers for districts in all the states. 27. Horizontal (and vertical) equity are traditional public finance taxpayer equity concepts that are used to judge the relationship between tax burdens and income. We do not discuss them here as taxpayer concepts because they have not been used extensively to date in school finance taxpayer equity analyses. 28. For example, if at-risk students have been treated equally to one another throughout their schooling (and have been provided more resources than other students), we would expect (hope) that the students would perform equally to other students who are not at-risk by the end of their K-12 education (or even before that). 29. Price adjustments are often part of horizontal equity analyses because they are meant to adjust the nominal dollars to reflect differences in prices of constant quality inputs across districts. Student weights are used in vertical equity analyses to reflect differences in costs of educating pupils. Following the publication of Berne and Stiefel’s book, many district-level vertical equity analy- ses have been performed and reported in the Journal of Education Finance. 30. Since the publication of Parrish et al.’s Disparities in Public School District Spending: 1989-90, Chambers (1997) has estimated new cost-of-educa- tion indexes for all districts in the United States. 31. Duncombe et al. (1996) use Data Envelopment Analysis (DEA) as a way to construct an efficiency index to include in their cost functions. 32. Downes and Pogue (1994) also estimate indirect cost functions or ex- penditure functions as a way to empirically derive cost indexes. 33. See Trimble and Forsaith (1995:606-607) for a quote from Rose v. Council for Better Education. 34. Clune (1995a:658): “The rest of this article is an effort to point toward the direction of true educational adequacy for economically poor children.” 35. “The education debate riveting the Statehouse abruptly has shifted gears, U-turning from how much to tax Ohioans to what to give them in return. . . . As a result, lawmakers over the next two weeks are likely to enact sweeping reforms aimed at improving student performance and holding schools accountable for the money they spend and results they achieve” (Hallet and Marrison, 1997). ACKNOWLEDGMENTS We wish to thank Helen Ladd, Kenneth Strike, Amy Ellen Schwartz, and two anonymous reviewers for helpful comments on earlier drafts of this chapter. The authors alone are responsible for the content of the final version of the chapter.

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32 CONCEPTS OF SCHOOL FINANCE EQUITY Ladd, H F., and J.M. Yinger 1989 America’s Ailing Cities: Fiscal Health and the Design of Urban Policy. Baltimore: Johns Hopkins University Press. 1994 The case for equalizing aid. National Tax Journal 47(1):211-224. McMahon, W.W., and S. Chang 1991 Geographical Cost of Living Differences: Interstate and Intrastate Update 1991, MacArthur/Spencer Series Number 20. Normal, IL: Center for the Study of Educational Finance, Illinois State University. Morgan, M.I., A.S. Cohen, and H. Hershkoff 1995 Establishing education program inadequacy: The Alabama example. University of Michi- gan Journal of Law Reform 28(3):559-598. Moser, M. 1996 School-Based Budgeting in Rochester, New York. Part of Final Report to Andrew W. Mellon Foundation for Study of Resource Allocation in Urban Public Schools. New York: Robert F. Wagner Graduate School of Public Service. Mosteller, F., R.J. Light, and J. Sachs 1996 Sustained inquiry in education: Lessons from skill grouping and class size. Harvard Educational Review 66(4):797-842. National Commission on Excellence in Education 1983 A Nation at Risk: The Imperative for Educational Reform. Washington, DC: U.S. Gov- ernment Printing Office. Odden, A.R., and L.O. Picus 1992 School Finance: A Policy Perspective. New York: McGraw-Hill. Parrish, T., C. Matsumoto, and W. Fowler, Jr. 1995 Disparities in Public School District Spending: 1989-90. Washington, DC: National Center for Education Statistics, U.S. Department of Education. Rosen, H. 1992 Public Finance. Homewood, IL: Irwin. Rubenstein, R. 1998 Resource equity in the Chicago public schools: A school-level approach. Journal of Education Finance 23(4):468-489. Sample, P.R., and W.T. Hartman 1990 An equity simulation of Pennsylvania’s school finance system. Journal of Education Finance 16(1):49-69. Schwartz, M., and J. Moskowitz 1988 Fiscal Equity in the United States 1984-85. Washington, DC: Decisions Resource Cor- poration. Sherman, J. 1996 School-Based Budgeting in Fort Worth, Texas. Part of Final Report to Andrew W. Mellon Foundation for Study of Resource Allocation in Urban Public Schools. New York: Robert F. Wagner Graduate School of Public Service. Strauss, R.P. 1995 Reducing New York’s reliance on the school property tax. Journal of Education Finance 20(1):123-164. Strike, K.A. 1988 The ethics of resource allocation in education. Pp. 143-180 in Microlevel School Fi- nance, D.H. Monk and J.K. Underwood, eds. Cambridge, MA: Ballinger. Trimble, C.S., and A.C. Forsaith 1995 Achieving equity and excellence in Kentucky education. University of Michigan Journal of Law Reform 28(3):599-653.

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33 ROBERT BERNE AND LEANNA STIEFEL Underwood, J.K. 1995 School finance adequacy as vertical equity. University of Michigan Journal of Law Reform 28(3):493-519. U.S. General Accounting Office 1997 School Finance: State Efforts to Reduce Funding Gaps Between Poor and Wealthy Dis- tricts. GAO/HEHS-97-31. Washington, DC: U.S. General Accounting Office. Wise, A. 1968 Rich Schools, Poor Schools: The Promise of Equal Educational Opportunity. Chicago: University of Chicago Press. Wyckoff, J.H. 1992 The interstate equality of public primary and secondary education resources in the U.S., 1980-1987. Economics of Education Review 11(1):19-30.