School finance reform is an
issue that has been on New York State's agenda almost continuously
since the 1960's. Court cases have been brought, a multitude of
studies have been done, and commissions and task forces have reported,
yet we are still very far from a satisfactory solution.
Introduction to School Aid, Comptroller's Report on School Finance
The paper is presented in three
sections. The first section provides a general background on school
finance, describing how schools are funded, how state aid is distributed,
and what the essential equity issue is. The narrative is issue-oriented,
intentionally avoiding a description of the algebra behind the aid
distribution. Detailed knowledge of the mechanics is not necessary
to a thorough understanding of the issues, and too technical a focus
can often obscure the larger concerns.
A second section describes
long-term trends and recent developments in school finance. It includes
a description of spending trends, changes in the aid distribution,
the 1993-94 reforms and their implementation. This year's "modified
freeze" in the school aid formulas is reviewed, including its
negative impact on equity.
In New York, as in most other
states, public elementary and secondary education is provided through
local school districts and supported by a mix of local, state and
federal revenues. The primary source of local revenues for schools
is the property tax.
More than $25 billion is now spent annually in school districts across the State, of which there are nearly 700. Recent data show that about 56 percent of school revenue comes from local sources, state aid provides 40 percent, and federal aid about 4 percent. The local portion of school revenues is primarily from the property tax (90 percent). In addition to property taxes, in some counties school districts receive a portion of sales tax receipts and some small city school districts impose consumer utility taxes. The federal government is not a significant source of revenues for most school districts.
The state share of education
expenditures in New York is influenced both by state aid levels
and by trends in local spending. Roughly speaking, it has been in
the neighborhood of 40 percent since the 1950's, going up in good
times and tending to drop during periods of state fiscal difficulty.
A state share of 40 percent is lower than the national average,
which is approximately 46 percent in the 1993-94 school year. Advocacy
groups have long called for a higher state share, often saying that
50 percent is appropriate. An increase in the state share to 50
percent, however, would require about $3 billion in additional state
aid -- an unlikely event in the current fiscal environment.
Note that the state share discussed
here is the aggregate share for the entire state -- the share varies
considerably across districts. Some schools receive a much higher
percentage of their revenues from the state (generally, these are
low-wealth, low-spending districts) and others support nearly all
of their expenditures from local sources (generally high-wealth,
Much confusion exists over
the use of state lottery revenues for education. The lottery began
in 1967 following passage of an amendment to the state constitution
permitting a lottery, the net proceeds of which were to support
of education. Of the total receipts from game sales last year, 41
percent went to education, 48 percent was paid out in prizes, and
11 percent went to administration.
The lottery proceeds do go
to education, currently providing more than $1 billion annually
to help support state aid, representing about one-tenth of total
state aid payments. Lottery proceeds, however, do not really go
to school districts in amounts over and above the State's contribution
through general aid programs. Each year, the Governor and Legislature
negotiate a state aid distribution. While lottery proceeds do help
to fund each year's aid package, lottery earnings are not added
to a planned general fund contribution after the fact. The estimates
for lottery earnings, in fact, are treated almost exactly as the
estimates for the earnings of other state revenue sources.
This year, for example, the
Governor proposed implementing a new "Quick Draw" lottery
game and the Legislature accepted this proposal, with some modifications.
From the beginning, the addition of the new lottery game was discussed
as a way to help close the overall budget gap, not as an issue related
to the amount of school aid that would be provided. The Quick Draw
game as proposed by the Governor was expected to raise $115 million
initially, yet his budget proposal reduced school aid by $90 million
for the 1995-96 school year. The enacted budget, largely because
of a later starting date, reduced the estimate for the first year's
Quick Draw earnings, but increased school aid. Clearly there was
no linkage between the new game's earnings and school aid payments.
It should be noted, however,
that the availability of lottery proceeds over the years may have
allowed increases in school aid that otherwise may not have been
Nearly $10 billion in state
aid is apportioned among local school districts through a variety
of aid formulas and grant programs. Each year the aid programs are
modified in the budget. While the mechanics behind the distribution
of school aid are fairly complex, the issues are not necessarily
so. For example, there are currently some 46 aid formulas and grant
programs and only a small group of school aid specialists have an
in-depth understanding of those aid categories and the algebra behind
the formulas. However, a technical understanding is not necessary
to grasp the essential issues.
The vast majority of state
school aid is paid through aid formulas that are designed to recognize
local need. Relative need in the formulas is generally determined
by district wealth and expressed as an aid ratio, but myriad other
factors are built in. These other factors include special pupil
counts representing educational needs; overall operating expenditures
as well as specific expenditures in areas such as building, transportation
and handicapped education; and measures of tax effort. Most aid
formulas pay aid on a "per pupil" basis -- an aid amount
is multiplied by a pupil count to determine total aid. In addition
to the formula distributions, there are a number of grant programs
where aid payments are either legislatively determined or allocated
through an application process, but these programs represent only
a small proportion of overall aid.
School aid formulas generally pay aid in inverse proportion to wealth. The formulas measure "wealth" based on property value per pupil and resident income per pupil. Pupil counts are based on average daily attendance and contain differential weightings for certain categories of students. The amount of state aid a district receives is in large part determined by the ratio of property and income wealth measures for the district to the state average. The most commonly used ratio, based half on property wealth and half on income, is referred to as the "combined wealth ratio."
The chart at right illustrates
the fact that higher aid payments go to school districts as their
relative wealth decreases. State aid per pupil is lowest for the
highest wealth districts (the first decile). Lower wealth school
districts receive proportionally more aid per pupil. The payment
of aid in inverse proportion to wealth is often referred to as an
"equalized" aid distribution.
The increasing aid paid to
lower-wealth districts results in a generally higher state share
for expenditures in lower-wealth areas, as illustrated by the chart
at left. This trend is accentuated because lower-wealth districts
tend to spend at lower levels, measured on a per pupil basis. The
disparity in expenditure levels is at the heart of the equity issue.
Each wealth "decile"
shown in the charts represents a tenth of the State's school districts
grouped by wealth (the combined wealth ratio). Although each decile
contains a tenth of the school districts, the number of pupils within
a decile varies widely. For example, the 4th wealth decile contains
45 percent of statewide enrollment, largely because it includes
the New York City school system.
With a few exceptions, most
of the aid formulas provide aid on an equalized basis, meaning that
poorer districts receive a higher relative share of aid. There are,
however, other factors involved in the distribution of aid which
limit the amount of equalization provided, including minimum aid
grants, "save-harmless" provisions and "caps."
Save-harmless provisions prevent
districts from receiving less aid from year to year even though
they may have fewer pupils, lower expenses, higher wealth, or any
other change in underlying conditions which would cause them to
receive less aid. The chief save-harmless provision in the current
aid formulas is contained within the "transition adjustment"
which ensures that no district receives lower aid across nine aid
formulas than in the previous year. The transition adjustment also
caps aid, limiting the increase which each school district can receive.
Minimum aid guarantees, save-harmless provisions and caps all decrease
the equalization the formulas would otherwise provide.
"Operating aid" is
the largest aid formula, representing slightly more than half of
total aid. This formula provides general aid to districts for their
expenses through an aid ratio based on property and income wealth.
The formula delivers a higher share of aid for lower wealth districts;
it also contains a minimum aid amount (the "flat grant"),
and a number of limits, exceptions and other provisions. A related
"extraordinary needs" component of aid distributes general
aid based upon income wealth and a number of factors intended to
measure the proportion of disadvantaged pupils within a district.
Two other general aid formulas
specifically address local tax effort. These formulas are based
on tax levies, spending and wealth and, among other things, are
designed to help districts with limited resources located in high-expense
regions of the State.
Most of the remaining school
aid formulas are linked to particular activities such as transportation,
building, or handicapped education. Again, most of these formulas
employ an aid ratio based on a district's relative wealth, so that
lower-wealth districts receive proportionally higher shares of aid.
Some aid formulas do not reflect relative need, but these only represent
a small component of aid. Textbook aid, for example, is paid to
all districts on the basis of a flat dollar amount per pupil; other
formulas, such as those for computer software and library materials
are similar in nature.
There are also a number of
grant programs and aid categories in which legislatively specified
amounts go to particular districts. These aid programs are generally
not related on a formula basis to wealth or need. A large proportion
of these programs, however, do aid areas presumed to be needy, the
large city school districts in particular.
Sometimes a distinction is drawn between the "computer run total" and other aid. More than 90 percent of state aid is shown on State Education Department computer runs. Sometimes manipulations occur in this regard. This year, for example, Excellence in Teaching aid was not shown on computer runs, and thus its elimination did not show as a loss for districts. While the "non-computerized" grant programs and aid formulas do not represent a large proportion of total aid, they are significant for some districts, particularly the large city school districts.
Despite the school aid formulas'
equalizing impact, educational spending varies significantly with
local wealth. Wealthier districts spend at much higher levels than
poor school districts.
Local property taxes pay for
the majority of public school expenses. Property wealth, as well
as income with which to pay property taxes, is not evenly distributed
among school districts. Great disparities in spending, and thus
in educational programs, are largely a function of variations in
the local property tax base available to finance education.
Although state aid is generally
paid in inverse proportion to wealth, the aid payments are not high
enough in the low-wealth areas to effectively allow them to spend
in amounts similar to wealthier districts. Thus, while state aid
is redistributive, it is not enough so to effectively equalize opportunity.
The property tax is regressive
and often inequitably administered. Reducing reliance on it as a
revenue source is therefore attractive on its own merits, beyond
the issue of equalizing school spending. Although property tax reform
is not a subject of this discussion, it should be noted that improvements
in administration of the tax are possible. To a large extent, property
tax inequities and inaccuracies are the result of its administration
through more than 900 localities -- a regional assessment model
may be much more effective.
Property taxes can also be made less regressive through state income tax "circuit breaker" programs which provide a tax credit for lower-income persons carrying a high property tax burden; New York State has such a program, but it currently operates at a very low level.
The chart to the right shows
the clear relationship between wealth and spending. The amounts
shown are averages for groups of districts ordered by relative wealth.
While on average the wealthiest tenth of districts (the 1st decile)
spends more than $11,000 per pupil annually, the poorest tenth spends
less than $5,000. Wealth-driven disparities in spending and programs
is the central issue of school finance reform.
It is not generally argued
that there should be no spending variances among schools,
because New York State has a strong tradition of local control of
education. The argument is more that the spending variances should
be less stark and that the lower-wealth areas should receive more
help so that they can improve their educational programs.
Spending differences reflect
both differing preferences among school districts and also differing
fiscal capacities. However, the extent to which they represent one
or the other is extremely hard to isolate. A relatively greater
disposition to commit resources to education tends to be found in
areas with relatively greater resources to commit. Regional cost
differences also affect spending levels and some areas face higher
costs due to relatively greater concentrations of disadvantaged
One critical issue is whether
the spending disparities result in students in the poorer districts
receiving less than a sound basic education. This was the element
on which the most recent major New York State school finance case
turned. In the 1982 Levittown decision the Court of Appeals
found that the school finance system did not violate the state constitution's
education provisions because those provisions required only that
"minimally acceptable schools" be provided.
A current school finance case,
Campaign for Fiscal Equity vs. State of New York, is similar
to the earlier case but also includes claims based on the federal
Civil Rights Act. In a preliminary ruling allowing the case to go
forward, the Court of Appeals stated that, while the 1982 Levittown
decision held that moderate variation in funding levels was tolerable,
it was possible that the variation has become so extreme as to permit
judicial intervention. As in the previous case, however, the Court
did not specify what is meant by "minimally acceptable schools."
It is difficult to guess what the outcome of this case will be,
but it will, in any event, probably take many years at trial and
in appeals. As a reference point, the Levittown case was
in the courts for eight years before final resolution.
Trends and Recent Developments
Trends in School Finance
While aid amounts have gone
up in nominal terms, and the state share of expenditures has gone
up and down, the essential issues remain the same as they were 20
years ago. The inequity of the heavy reliance on the property tax,
the spending disparities and the gap between the wealthy and poor
school districts are still the key issues. Much has also changed,
however, and the state aid formula has gotten much, much more complex.
In 1974-75, there were only
three major categories of aid for school districts: operating, building
and transportation. The algebra behind the formula was simple enough
that the State Education Department put out a small booklet with
the intent of explaining it to the public.
There are now some 46 formulas
and grant programs that comprise state aid, and the esoteric methods
behind the formula distribution have become almost entirely the
province of school finance specialists. Previously described as
an "elegant formula," the distribution mechanics now involve
a complex amalgamation of formula factors, many of which bear no
rational relationship to any describable state aid goal. The computer
run distribution of aid and the "shares" issue are the
major focal points of the annual school aid negotiations.
This is not to suggest that
all the changes have been negative. The formulas now provide significant
aid for handicapped education programs, for students with special
needs and for school districts with a greater proportion of disadvantaged
students. The following discussion provides an overview of some
of the major trends in school finance in the past two decades.
Aid programs directed to particular
needs are sometimes referred to as "categorical" aids,
as distinct from aid programs supporting general operating expenses.
The growth of these categorical aids during the last decade was
phenomenal. For example, there are now specific formulas for gifted
and talented pupils, limited English proficiency programs (LEP),
educationally related support services aid (ERSSA), computer hardware
and technology, library materials, and many, many more.
The rapid expansion of categorical
aids, primarily occurring in the early 1980's, was driven not only
by a legitimate concern for programs in these areas, but also by
distributional concerns. The continuing addition of new categorical
aid programs allowed all districts to get aid increases,
even "save-harmless" districts that would otherwise have
gotten no increases during those years. Although most of the categorical
formulas employ aid ratios, they also have minimum aid provisions
and so, in most cases, each time a new formula was added, even the
wealthiest districts got additional funding. Program advocates for
particular types of education also supported the new aid categories,
and announcing a new aid program was more attractive than merely
saying that more money was being provided for schools.
Another big change has been
in the area of wealth measures. In 1974-75, only property wealth
was considered in the aid formula. In the early 1980's, income began
to be used in the aid distribution. It was first used in a small
supplementary formula, but its use continued to be expanded and
today income and property wealth are of approximately equal importance
in the state aid distribution.
The use of income in the formula
was initially spurred by frustration with the quality of the property
wealth data and by academic research suggesting that income levels
were an important determinant of educational spending. Perhaps the
most important consideration behind the legislative expansion of
income in the formula, however, was the distribution its
use in the aid formulas provided.
Interestingly, all of the research
on income was based on household income or other measures approximating
average income levels. The income measure employed in the formula,
however, has always been income per pupil. Income per pupil
measures not only the income levels within a community, but also
the relative concentration of households with children in the public
schools as a share of the total income-earning population. While
urban areas often have lower average income levels, they have large
portions of the population without school-age children or that utilize
private schools; income per pupil measures are therefore less favorable
to them as a wealth measure, because they show them as being relatively
wealthier and consequently reduce aid. Conversely, many suburban
areas with higher average incomes actually benefit from the use
of income per pupil, because their relatively higher share of public
school children skews the measure, making them seem less wealthy
and increasing their aid.
The frustrations with the property
value data stem from inaccurate assessment practices and their effect
on the "full value" data calculated using equalization
rates and applied in the aid formulas. Improvements have been made
in the full value data since the time income was introduced in the
formula, particularly a reduction of the lag in the market survey
data used to establish full value. However, the quality of the data
is still a major issue as are inaccurate assessment practices.
The State's fiscal crisis in
the early 1990's led to the so-called deficit reduction assessments,
or DRA's. Essentially, these assessments were reductions in aid
determined by a formula approach and reducing the aid payments received
through the regular formulas. The first DRA was applied in the middle
of a school year, in reaction to the State's midyear budget crisis,
giving school districts their own considerable midyear budget problems.
Despite their unpopular nature, it should be noted that the DRA's had the overall effect of making school aid payments more equalized. The reductions were made on the basis of formulas which more heavily impacted wealthier districts and districts which had benefited from save-harmless for a number of years; the long-term effect was to lower the proportion of school aid paid through save-harmless. The DRA's were in effect for the 1990-91 through 1992-93 school years. Before their elimination with the 1993-94 school aid reforms, the DRA's reduced overall state aid by more than $1 billion.
The 1993-94 budget contained
a series of formula changes and some consolidations, patterned after
the recommendations in the 1988 report of the Salerno Commission,
a special task force that studied school aid. The Salerno Commission's
recommendations were general in nature; they endorsed a series of
principles rather than attempting to agree on a single formula.
In so doing they avoided the experience of an earlier task force
associated with the Levittowncase, which could not agree
on a single formula.
The formula changes adopted
in 1993-94 were announced as the most sweeping reforms in more than
a decade. However, it is arguable whether one of the major goals
of the 1993-94 changes, simplification of the formula, was in fact
achieved. Some small categorical aids and some supplemental operating
aid formula distributions were merged into operating aid proper,
but the operating aid formula itself became much more complex. Following
the Salerno Commission's recommendations, the 1993-94 formula changes
did more heavily reflect the costs of educating at risk students
and they also incorporated actual spending levels and tax rates
more significantly in the formula, in recognition of differences
in regional costs.
The 1993-94 formula changes,
however, did not initially result in a significant redistribution
of aid and they have never been fully funded. The formula changes
were accompanied by a "transition adjustment" covering
nine formulas and providing both save-harmless protection against
losses in aid and also limits or caps in aid increases. The transition
adjustment has also been referred to as a "collar" because
it can both govern increases and prevent (or limit) decreases.
The caps in aid increases were
helpful in achieving the 1993-94 reforms, as the State could not
have afforded immediate implementation of the new formula. It should
be noted, however, that the reinstatement of caps in formula aid
reversed a reform accomplished in the previous decade. Increases
in operating aid were routinely capped in the 1980's. The caps limited
equalization by preventing lower-wealth districts from receiving
their full formula aid and their elimination was a considerable
In the 1993-94 school year,
the first year of the revised formula, the increases were limited
to 3 percent, with a further adjustment for enrollment growth. The
major formula changes therefore had little effect, and for most
school districts aid was determined by the transition adjustment;
they either got the growth adjusted 3 percent increase or no change
in aid. The underlying formula changes had the potential to dramatically
redistribute funding, but did not do so initially.
In 1994-95, fueled by a budget
surplus, a $550 million increase in school aid was provided and
the transition cap was loosened to allow aid increases of up to
6.85 percent. The changes allowed the formula to operate more freely
and improved equalization under the aid formula. This movement forward
in equalization, however, came to a halt with the 1995-96 budget
and its freeze of the aid formulas.
To complete the phase-in of
the 1993-94 formula reforms in 1995-96 would have required about
$500 million beyond what was allocated, on a school year basis.
(A precise, objective estimate of what full funding would cost is
prevented by interim formula changes, including new lags built into
the aid calculation.)
The combination of the deficit
reduction assessments and the 1993-94 reforms (to the extent they
have been allowed to phase in) has been to produce a more equalized
aid distribution. The chart at left graphically portrays this improvement.
For school districts in the first three (highest wealth) deciles,
state aid per pupil has been reduced since 1989-90. For districts
above those wealth levels aid has been increased, most dramatically
for districts in the lower wealth deciles.
Note: for comparability purposes,
the data in this chart represent computerized aid per total aidable
pupil unit and thus do not match the data for 1995-96 state aid
per enrolled pupil shown earlier.
A central tenet in the case
for reform is that the spending disparities among school districts,
largely driven by wealth, are simply too great. There is, however,
no generally accepted single method of measuring the disparity.
A variety of statistical approaches are possible, ranging from complex
correlation procedures to simply comparing the highest spending
district to the lowest. Despite these problems, it is important
to consider the broad trends in spending variations.
The State Education Department
annually publishes statistics on school district spending showing
the variances among districts on a per pupil basis. Included in
their statistics is the difference between districts at the 10th
and 90th percentiles of spending. As this difference in spending
expressed in a dollar amount would increase over time with inflation,
even with no real change in the level of disparity, their statistics
include the difference shown as a percentage of the spending level
at the 10th percentile.
of School District Spending
Source: State Education Department,
"Analysis of School Finances in New York State School Districts,
1992-93. *Data for 1993-94 and 1994-95 are preliminary, based upon
State Education Department data provided to the Comptroller's Office
and analyzed for this report.
The data indicate a widening disparity since 1974-75, the year the Levittowncase was brought. However, a reduction in the spending disparity has occurred since the mid-1980's. It is interesting to note that the expenditure disparities were widening in the first half of the 1980's during a period when state aid was being greatly increased and the aggregate state share of expenditures was generally increasing. As noted earlier, this was also a period during which a great number of categorical aids were added, the distribution of which was, to certain extent, disequalizing.
More recent data from the Education
Department, not yet summarized in their publications, suggests that
the pattern of slightly decreased expenditure variations is continuing.
Data available for the 1993-94 and 1994-95 school years, although
preliminary, shows the relative variation in school district spending
between the 10th and 90th percentiles to have dropped below 100
percent. Other statistical measurements show similar results. This
reduction in the expenditure variations since the late 1980's may
be caused in part by the improved equalization in the aid distribution.
An analysis of changes in average spending levels among school districts
grouped by wealth tends to support such a theory.
The chart to the right shows
that, on average, lower-wealth districts per-pupil expenditures
have increased by a higher percentage than those of higher-wealth
school districts during the periodfrom 1991-92 to 1994-95. Data
for 1994-95 is still preliminary, however, and caution should be
used in interpreting these statistics. Nonetheless, it appears that
slight reductions in wealth-related spending disparities have occurred.
It is important to note that these figures are based on the formula
distribution and district expenditure changesbefore the
current school year, when a modified freeze of aid was enacted.
That freeze may have eroded the apparent recent improvements in
School Aid Provisions
in the 1995-96 Budget
The "modified freeze"
of the school aid formulas in this year's budget reduced equity
in the finance system.
Failing to address equity in
the state aid distribution, even in a single year, may be thought
of as standing still. However, as local school districts face growing
expenses, the poorer districts are less able to address these needs.
Stasis in the aid distribution as expenses grow therefore has the
effect of actually reducing equity.
Most school aid formulas were
frozen for the 1995-96 school year, with the exceptions being changes
allowed in several expense-driven formulas, adjustments for districts
with growing enrollments and other changes in various grant programs.
The freeze of the formulas undercut the corrective distribution
originally intended. Aid increases went to districts with increasing
enrollments or growing expenses in certain areas, and thus were
not in any way targeted to equity or wealth-related need.
In fact, the results of the
modified freeze have been somewhat perverse: higher-wealth and
higher-spending districts have done proportionately better than
lower-wealth, lower-spending districts. This situation is shown
in the two charts on the following page. When ranked by both wealth
and spending, the highest-wealth and highest-spending districts
received the largest percentage increase in aid. This step backwards
in equity is of particular concern given that a court challenge
to the educational finance system is under way.
This year's enacted budget
increased school aid by $68 million in the 1995-96 school year,
an increase of just slightly over one-half of one percent. In comparison,
the average annual increase in school aid over the previous ten
years has been six percent.
The 1995-96 school year aid
increase is also far below what the previous year's statutory formulas
would have provided. This situation results in large part because
the changes made several years ago in the school aid formulas are
still phasing in through the transition adjustment. Many needy districts
would have had significant increases in the 1995-96 school year
if the school aid statutes had not been altered in the budget legislation.
In 1995-96, the transition
adjustment simply freezes aid: no district is allowed either an
increase or a decrease. If school districts had been capped at a
6.85 percent increase level, as in the previous year, 297 districts
would have benefited, receiving an aggregate increase of $184 million.
The save-harmless protection in the transition adjustment results
in payments of $160 million in 1995-96 to districts that otherwise
would have lost aid under the formulas; note that this is roughly
equivalent to the increase that would have been received under last
In essence, the modified freeze
of the formulas enacted with this year's budget took the path of
least resistance. Both the Executive Budget and the legislatively
enacted version failed completely to address the equity issue. This
result, however, was a policy choice. Freezing the status quo is
not the only possible response to living within limited resources.
It would have been possible,
for example, to loosen the transition adjustment provisions and
let the formula operate more freely. If other adjustments were made
in the formula, this could have been accomplished without additional
resources. The distribution of aid would have been more equalized,
and the school districts at the highest levels of wealth and spending
would not have received the highest relative increases.
There are essentially four
major alternatives to pursue statewide school finance reform:
These options are listed separately
in simplified fashion for discussion purposes, although in reality
there are countless variations and mixtures of these basic approaches.
The first two options deal only with changing the distribution of
state aid; the latter two represent structural changes.
On a case-by-case basis, school
district consolidations and shared services ventures represent yet
another approach for achieving enhanced efficiency and tax base
broadening. They are not discussed here, however, as they do not
represent a statewide solution.
The first option, significantly
increasing state aid to provide infusions of new funds for low-wealth,
low-spending or otherwise overburdened districts has been the favored
approach over time among advocacy groups. Of course, even within
this general approach, there is the question of how to distribute
the additional aid (who gets how much). In fact, even when massive
increases in aid are contemplated, it is very difficult to obtain
consensus on a single formula approach.
But a large-scale increase
is impractical from a state fiscal perspective at the current time.
The only way such a change would be possible is through a corresponding
increase in some state revenue source -- an unlikely event given
the current emphasis on state-level tax cuts.
Governor Carey in 1982 proposed
a large increase in school aid funded through a one percent increase
in the sales tax, but even under the threat of the then-pending
Levittown case, his proposal was resoundingly rejected.
As part of the recent school
finance reforms in Michigan, however, the state sales tax was increased
from 4 to 6 percent, with the revenues earmarked for education.
The reliance on local property taxes was dramatically reduced, although
not eliminated, and the state's share of education expenditures
was increased to 80 percent. The Michigan reforms also included
a series of local revenue limitations. In New York State, however,
the combined state and local sales tax rate is already considered
to be a problem in terms of interstate competitiveness. An increase
in the sales tax may therefore not be a viable alternative here.
It should also be noted that Michigan's education aid is partially
funded through a state property tax.
Redistribution -- increases
for low-wealth, high-need districts funded by reductions in aid
for relatively better off districts -- is certainly fiscally
feasible, but it has proved to be politically infeasible over time.
The objections to reducing school aid for any district or group
of districts are simply too strong.
Executive Budget proposals
(prior to this year) have most often included some degree of redistribution,
as have Regents proposals, but most such proposals have not been
accepted by the Legislature. Repeated calls for redistribution during
the Levittown period were ignored, even when it was widely
believed that the State would probably lose the case. The only time
aid has been significantly cut for any district was during the extreme
fiscal difficulties in the early 1990's through the deficit reduction
assessments (DRA's). These reductions were widespread and were in
response to a fiscal crisis -- they were not used to provide increases
for other districts.
Beyond legislative achievability,
there are other reasons for avoiding dramatic redistribution. Both
the school aid formula and the data that feed into it are flawed
and imprecise. The measurement of wealth and the formula mechanics
have changed significantly over the years and removing aid on the
basis of any one year's specific formula does not necessarily carry
the strength of an absolute and compelling rationale behind it.
It must also be acknowledged
that there are many different ways of redistributing aid
(really, an infinite number). Each constituency -- suburban districts,
rural districts, small cities, big cities, property-rich, property-poor,
high-cost, low-cost, etc. -- naturally favors redistributional methods
that are advantageous to it. The difficulty in gaining consensus
on a redistributional aid plan is even greater than for leveling
Partly because of the practical difficulties involved in achieving a straightforward redistribution of aid, proposals for fundamental systemic change have gained in popularity lately. Although they may involve an even more dramatic redistribution of resources, often the redistributive impact is unknown or is less apparent.
Providing new methods for school
districts to raise revenues locally is another approach to reform,
although this approach is aimed more at reducing reliance on the
property tax than toward reducing wealth-driven disparities in spending.
These proposals have gained in popularity recently, in part because
frustration with the property tax has become so great.
Local income taxes and sales
taxes are most frequently mentioned as potentials and proposals
often include a required reduction, freeze or elimination of existing
local property taxes. They may also include a redistribution component,
either by broadening the base for the new revenues beyond school
district boundaries or by changing the distribution of state aid
in concert with change in the tax base.
Among the issues to consider
are whether a new tax should supplement or replace (either partially
or completely) the local property tax for schools, whether the rate
should be set locally or statewide, and how the tax should be imposed
and administered. The programs can also be structured to be voluntary
for school districts and/or their voters.
New local revenue options dramatically
shift the proportions of tax burden carried by individuals and businesses
as well as among taxpayers within a class. But the redistributional
impact usually cannot be estimated precisely. In some ways, the
redistribution may be less visible than a change in state aid formulas,
where it is shown on a computer run as a gain or loss for each district.
Governor Cuomo proposed in
1993 that local school districts have the option of imposing an
income tax surcharge, either individually or together with other
school districts within a county. The Regents have also recently
published a study on the substitution of local income taxes for
property taxes. Other, less dramatic options in this category exist,
such as allowing non-city school districts to levy consumer utility
taxes, as city school districts now can.
It is important to consider
the administrative feasibility of new local revenue options. Income
and sales tax collections, for example, are quite volatile compared
to local property taxes. While the local property tax base changes
from year to year, it tends to change less dramatically than can
occur in the income or sales tax bases. The property tax base is
also essentially known before a rate is set, and so school districts
can reliably predict the revenues that they will receive; this is
not the case with income or sales taxes.
Changing the manner of raising
local revenues may also have dramatic economic development impacts,
both locally and statewide. It is questionable, for example, whether
it would be advantageous to have a variety of local income tax practices
(or, at least, rates) in areas all across the state. It also seems
counterproductive to cut state income taxes and at the same time
allow them to be raised locally.
It is also difficult to achieve
popular approval for a new local revenue source. These proposals
are often viewed negatively as a "new tax" even when the
intent is to substitute a new revenue source for existing property
But perhaps the most important
criticism, in the context of this discussion, is that switching
to a new local tax base for schools will not necessarily reduce
disparities in fiscal capacity and spending and may even worsen
them. Income wealth, like property wealth, is unequally distributed
among school districts, and the sales tax introduces even more complexities
and potential inequities. Unless combined with a base-broadening
approach or a redistribution of state aid, providing new revenue
sources will not solve the equity problem.
Property Tax Revenues
Sharing property taxes represents
a way of broadening the tax base for education without expanding
the state share of funding or resorting to new local revenue sources.
There have been a number of
proposals over the years to share property taxes regionally or statewide.
These proposals have ranged from full state funding through a uniform
statewide property tax to sharing a small tax (one or two mills)
among all school districts within a region. Governor Cuomo's Moreland
Act Commission recommended that nonresidential property taxes be
shared regionally and the Regents have recently issued studies on
regional tax base options.
The redistribution of existing
local revenues, however, carries with it all the problems of redistributing
state aid and is in some ways even more difficult to achieve --
it can be perceived as a more invasive redistribution, taking money
directly out of local coffers to send it elsewhere.
But the advantage of redistributing
property taxes is that equity can be dramatically improved without
additional state funds. Additionally, often the tax rates are very
low in high-wealth districts because in such districts a high level
of spending can be supported with only a low rate -- a regional
or statewide property tax therefore taps underutilized resources
and helps to equalize tax effort.
Many options and levels of
redistribution are possible within an expanded tax base approach.
It would be possible, for example, to institute a uniform statewide
property tax at the current average rate that would provide a uniform
statewide basic expenditure level for all districts. Property-poor
districts which currently cannot support even an average level of
spending with an above-average tax rate would be greatly assisted.
Local control could be maintained by allowing districts to levy
an additional tax within the district if increased spending were
desired. This approach could be adapted to a regional model, where
regional average tax rates and spending were applied; this would
account for the wide variations existing regionally in average spending
and wealth levels. Any tax base sharing plan could also be implemented
on a reduced level, to accommodate a less dramatic redistribution
or a phase-in period. The sharing of even a small proportion of
current property tax levels would greatly improve equity.
It should be noted, however,
that although broadening the tax base almost by definition results
in a more equalized distribution of resources, certain options in
this class may not be equalizing. For example, the sharing of nonresidential
property taxes among districts can redistribute resources from more
urbanized lower-income areas to wealthier bedroom suburbs, where
commercial development may be intentionally kept out. The Regents
study paper on this topic demonstrated that the sharing of nonresidential
property taxes, unless accompanied by a highly equalized redistribution
of aid, would increase variations in spending.
School finance reform has been
a topic of some controversy in New York State almost continuously
since the 1960's. A series of special commissions, task forces and
other groups have taken up the issue and produced voluminous reports.
And yet, there is still no consensus over basic issues.
It is also clear that the State
as a whole has been unwilling to redistribute resources, even during
periods of relative fiscal abundance. And several decades of studies
have shown that there is no overlooked formula change or "magic
bullet" which can remove the necessity of making hard choices
-- real reform cannot be achieved without them.
The current dialogue in school
finance reform is taking place in an environment where it is obvious
that large-scale state aid increases will not be possible. It may
also be true that no increases or, perhaps, big decreases
will be necessary in order to fund the growing impact of state-level
tax cuts. This is, in fact, one of the critical issues which should
have been better evaluated as this year's multiyear tax changes
were discussed, but which was not because of the lack of real long-term
planning in the budget process.
If a large increase is impossible
and consensus cannot be reached on a significant reallocation of
state resources, then other changes to the system must be considered.
Frustration with the current system, however, should not be allowed
to force unwise policy decisions that do not solve the existing
problems or create even greater new problems.
Despite the difficulties in changing the system and the State's current financial condition, the problem should not be ignored, as it was in this year's budget. To do so would not only be devastating to the lower-wealth districts, it may also create several long-term financial risks. The State's long-term economic prospects are closely linked to the performance of its educational system as a whole, including areas in need of additional resources. And the current court case on school finances raises equity issues which should be addressed in any event, but if the case were to result in a court-ordered solution, it is quite possible that such a solution would be fiscally devastating to the State, as has happened elsewhere. Increasing equity in advance of any court decision would help to lessen this risk.
-- Statistical Supplement
This appendix presents two
tables with school district data. The first table, "Background
School District Data," lists most of the data that is summarized
in charts presented in this report. Data elements are presented
for districts grouped by wealth and spending, as well as statewide
totals; a short description of each data element is also included.
The second table, "School District Profiles: Region and Type Categories," is intended to provide a basic statistical background on various groups of school districts. The data is provided for groups of school districts used by the State Education Department, including divisions by type (large city, small city, suburban, rural) and by geographic division (upstate, downstate). This data describes some of the basic differences in wealth, spending and other factors for districts across the state.
This report was designed to
provide a basic discussion of school aid finance issues
and alternatives, and as such, it has left out a great deal of detail.
A number of studies and annual publications are available for those
interested in this topic in greater detail, including the following:
Study on the Generation
of Revenues for Education, Final Report, New York State Board
of Regents (February, 1995): The final product of the Board of Regents
Study Group on the Generation of Revenues for Education. It includes
a variety of papers on property tax issues and on alternatives for
revenue generation and a summary of the policy options available.
Analysis of School Finances
in New York State School Districts 1992-93, State Education
Department (November, 1994): An annual report presenting trend data
on school finances.
Sixth Annual School District
Fiscal Profile Report, 1988-89 -- 1992-93 School Years, State
Education Department (June, 1995): An annual report presenting statistical
data on school districts by region and type.
State Formula Aids and
Entitlements for Schools in New York State 1994-95, State Education
Department (July, 1994): An annual report describing the various
types of state aid available to school districts, including an algebraic
description of the formulas.
Putting Children First,
New York State Special Commission on Educational Structure, Policies
and Practices (December, 1993): The report (in four volumes) of
Governor Cuomo's Moreland Act Commission; includes recommendations
and background research papers.
Funding for Fairness, The New York State Temporary State Commission on the Distribution of State Aid to Local School Districts (December 1988): Report of the "Salerno Commission," with recommendations for reform of the school aid formulas, many of which were reflected in the 1993-94 formula changes.