«THE EFFECT OF SCHOOL FINANCE REFORMS ON THE DISTRIBUTION OF SPENDING, ACADEMIC ACHIEVEMENT, AND ADULT OUTCOMES C. Kirabo Jackson Rucker Johnson ...»
Both graphical and statistical analyses confirm a structural break around the timing of either legislative or court-mandated reforms that is indicative of a causal effect of SFRs on perpupil spending. Consistent with previous findings, SFRs tend to reduce inequality in spending between low- and high-income districts. However, different types of reforms have different effects: court-mandated reforms tend to produce greater reductions in spending inequality than legislative reforms. Court-mandated reforms increase spending for low-income districts while legislative reforms tend to decrease spending for all districts. Adequacy-based court-mandated reforms lead to increases in per-pupil spending overall while equity-based court-mandated reforms reduce inequality with little effect on overall spending levels. Consistent with Hoxby (2001), the effect of reforms on tax prices is important: formulas that impose spending limits and 3 high tax prices on districts reduce spending, particularly for higher-income districts; formulas that match district efforts to raise local funds and impose low tax prices increase spending, particularly for lower-income districts.
In Part Two, which includes Sections IV through VII, we address the fourth question by investigating the effects of reform-induced changes in per-pupil spending on long-run educational and economic attainment outcomes. We link our school spending and reform data to detailed longitudinal data on a nationally-representative sample of over 15,000 children born between 1955 and 1985 and followed into adulthood through 2011 in the Panel Study of Income Dynamics (PSID). The PSID geocode data are linked with multiple data sources that describe school funding levels, neighborhood attributes, and coincident policies in order to study the effect of the reform-induced changes in school spending on long-run adult outcomes. These birth cohorts straddle the period in which most of the major school finance reform litigation accelerated, and thus were differentially exposed depending on place and year of birth.
We use the timing of passage of court-mandated reforms as an exogenous shifter of school spending. To accomplish this, we identify only those changes in school spending at the district level that resulted from court-mandated reform. For each district, we estimate the change in per-pupil spending that occurs after the passage of a court-mandated SFR, net of any underlying state-specific time effects and district trends. This, in essence, identifies those districts that experienced an increase or decrease in per-pupil spending in the years immediately following court-mandated SFR. We then link these district-specific policy-induced spending changes to longitudinal data of individuals born between 1955 and 1985 and followed through 2011 in the PSID. Because our sample includes sets of children from the same districts who were born in different years, some of these children were too old to be affected by reforms at the time of passage (not treated), some were old enough to be treated for some fraction of their school-age years (partially treated), and some were young enough to have entered school after the reforms were passed (fully treated). We combine the variation in exposure across cohorts within districts with the variation across districts in spending increases to implement a triple-difference strategy.
The strategy compares the difference in outcomes between treated and untreated cohorts within districts (variation in exposure) and across districts with larger or smaller changes in spending due to reforms (variation in intensity).
Results from our event-study and instrumental variable models reveal that increases in per-pupil spending, induced by court-mandated school finance reforms, led to significant 4 increases in the likelihood of graduating from high school and educational attainment for poor children, and thereby narrowed adult socioeconomic attainment differences between those raised in poor and affluent families. While we find no effect for children from non-poor families, for poor children, a twenty percent increase in per-pupil spending each year for all 12 years of public school is associated with nearly a full additional year of completed education, 25 percent higher earnings, and a 20 percentage-point reduction in the annual incidence of poverty in adulthood.
We present several key patterns that indicate that these improvements reflect the causal effect of school spending and show that these results persist with controls for other coincident policies (e.g., desegregation and "War on Poverty" initiatives and related safety-net programs).
These results provide compelling evidence that the SFRs of the 1970s through 2000s had important effects on the distribution of school spending and the subsequent socioeconomic wellbeing of affected students. Importantly, the results also speak to the broader question of whether money matters. After Coleman (1966), many have questioned whether increased school spending can really help improve the educational and lifetime outcomes of children from disadvantaged backgrounds. The results in this paper demonstrate that it can.
The remainder of the paper is organized into Part One (containing Sections II and III) and Part Two (containing Sections IV through VII). Section II describes the policy landscape and the data used for the first part of the paper. Section III outlines our main empirical strategy and presents an event-study analysis of the effect of reforms on school spending; it presents regression results to quantify the magnitudes and significance of the estimated effects on school spending and concludes the first part of the analysis. Section IV presents the data used for the second part of the analysis. Section V outlines the triple-difference empirical strategy for identifying the effects of SFRs on long-run outcomes. Section VI presents both event-study and instrumental variables regression results for the effect of school spending on longer-run outcomes, and Section VII presents our conclusions.
II. A Discussion of School Reforms and School Finance Data The centerpiece of equity for children is having the same educational opportunity irrespective of place of residence, race/ethnicity, gender, etc. Toward this aim, starting in the early 1970s there were many court-ordered school finance reforms, legislative actions, and changes to how public schools were financed. The movement toward school finance reform litigation and the ensuing debates about the constitutionality of local finance systems were based on the legal arguments presented in the successful school desegregation cases (Johnson, 2013).
Early school finance cases were founded on the basis that existing local systems of school finance violated the Equal Protection Clause of the Fourteenth Amendment of the U.S.
Constitution, as school resources would then be a function of a local communities’ wealth. These early challenges to existing local systems of school finance based on Federal Constitutional law were unsuccessful. However, this led to two subsequent waves of successful challenges based on state constitutional law.
These two waves of court-mandated reforms were distinct not only in time but also in motivation (Briffault, 2005). In the first wave, known as “equity cases,” proponents of state funding argued that local financing violated the responsibility of the state to provide a quality education to all children. They asserted that public education was a “fundamental interest” for equal protection purposes and thus could not be distributed unequally within a state based on geography absent any “compelling state interest.” The motivation was that “poor” school districts had little property wealth to tax in order to support their local schools, while “rich” school districts had much more at their disposal. As such, despite the greater tax effort by residents in these poor school districts, they would end up with less money per pupil because of the difference in assessed wealth. Cases during the second wave of successful challenges were argued on adequacy grounds. “Adequacy cases” rely on the fact that virtually all states have a constitutional provision requiring the state to provide some level of free education for children (Lindseth, 2004). These cases were argued on the ground that prevailing low levels of educational resources in certain districts (typically low-income areas) violated the state’s duty to provide the necessary educational opportunities guaranteed by the state constitution.
The mechanism through which the goal of fiscal (wealth) neutrality was achieved was by changing state aid distribution formulas. SFRs changed the parameters of spending formulas to 6 reduce the strength of the relationship between the level of educational spending and the wealth of the district. Most changes in school finance formulas due to reforms aim to (a) account for differences in the costs of achieving equal educational opportunity across schools and districts, and (b) account for differences in the ability of local public school districts to cover those costs.
The design of state aid formulas to meet these goals, however, is far from uniform. Legal scholars often rely on the language used in the case or legislation to classify types of reforms. In contrast, economists have emphasized how reforms affect the income and price incentives embedded in the state’s school financing formula (e.g., Hoxby, 2001). We also take this latter approach.
To assemble a comprehensive list of reforms, we extract details on the exact timing and type of court-ordered and legislative SFRs from Public School Finance Programs of the United States and Canada7 (PSFP) and the National Access Network’s state-by-state school finance litigation map (2011).8 We supplement these data with reform descriptions and school funding classifications from Murray, Evans, and Schwab (1998), Hoxby (2001), Card and Payne (2002), Hightower, Mitani, and Swanson (2010), and Baicker and Gordon (2006). In most cases, data from these sources are consistent with each other. Where there are discrepancies, we defer to PSFP and consult state court and legislative records for validation.9 From these various sources, we compile a comprehensive dataset of each school finance reform between 1970 and 2010.
Figure 1 presents the total number of states that ever had a legislative SFR, a courtmandated SFR, or a substantive change in the school funding formula for each year between 1967 and 2005. A few patterns are apparent. First, even though most studies focus on courtmandated reforms, many states had legislative SFRs or substantive changes in how schools were funded that were not court-mandated. Indeed, in 1996, while only 19 states had a court-mandated reform, 31 states had some kind of legislative SFR, and 45 states had experienced some kind of change to school funding formulas. Second, by 2005, most states had some form of SFR: 23
7 United States Office of Education [1969, 1972, 1974, 1979] and American Education Finance Association [1988, 1992, 1995].
8 http://www.schoolfunding.info/states/state_by_state.php3 9 There were discrepancies in reported timing of overturned court cases in several states: Connecticut (Hoxby states the decision was made in 1978, but Card and Payne report it was made in 1977), Kansas (Hoxby states 1976, but PSFP and ACCESS report 1972), New Jersey (Card and Payne state 1989, but PSFP says 1990), Washington (Murray, Evans, and Schwab, Hoxby, and Card and Payne report 1978, but PSFP reports 1977), Wyoming (Hoxby says 1983, but Card and Payne and Murray, Evans, and Schwab report 1980). We researched each case by name to discover the true date of the decision.
states had at least one court-mandated reform, 32 states had at least one legislative reform, and 45 had some change in funding formula. Third, there were two distinct waves of court-ordered SFRs, the first starting in 1971 and going through 1980 and the second between 1989 and 1997.
Figure 2 presents the number of states that had a court-mandated SFR on equity and/or adequacy grounds for each year between 1967 and 2010. As discussed above, most early courtmandated reforms (1970–1988) were litigated on equity grounds, and most of the later cases (1990–2010) were fought on adequacy grounds. Whether these different kinds of cases have different effects on spending is an empirical question that we address in Section III.
a. Classifying Reforms While different reforms may have been implemented with different motivations in mind, to describe how reforms might affect per-pupil spending, most economics studies describe reforms in terms of how they change school finance formulas. To a first-order approximation, district per-pupil expenditure (PPE) can be expressed as equation  below, where federal and state funding did not vary much across districts within a state prior to reforms.
 PPE = (Local Tax Rate) × (Local Tax Base ÷ number of Students) + (Federal Funding ÷ number of Students) + (State Funding ÷ number of Students) Inspection of  makes clear that, all else equal, districts with higher property tax bases (wealthier districts) will tend to spend more per pupil than districts with low property tax bases (poor districts). It is also apparent that, all else equal, districts with higher property tax rates (those that have a high demand for education) will tend to spend more than those with lower property tax rates (those with a lower demand for education). Given residential segregation by income and socioeconomic status, for both these reasons there is a tendency for wealthier districts to spend more per pupil on education than poor districts (Hoxby, 2001). Most reforms changed school spending formulas to offset spending differences due to differences in the local tax base and differences in the local tax rate across districts. However, there is substantial heterogeneity across states in exactly how this aim was pursued.