Summer Crop of Finance Studies

Last Updated: August 26, 2014

This article appeared in the August 2014 Rural Policy Matters.

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This summer has seen the release of several studies on school finance. The studies find correlations between spending on education and outcomes for students, especially low-income students. Although none of the studies discussed here focus on rural schools, their findings are relevant for rural places, students, and schools.

In this RPM review, we will look at several studies in terms of their overall findings and their implications for rural schools.

Spending matters, especially for low-income children

One of the more hotly debated issues in school finance is whether the level of spending makes a difference. It can be a tricky question. Opponents of school funding increases often argue that the level of funding makes no real difference to student outcomes. But that argument loses ground when it is applied to efforts to make funding more equitable between high- and low-spending districts, primarily because high-spending districts are generally loathe to reduce spending and risk student outcomes. They often fight equalization efforts that would reduce the amount of funding they receive from the state or their ability to provide as much local funding as they wish.

Several recent reports tie funding levels to outcomes.

The personal finance website WalletHub ranked state education systems on a number of factors in their report 2014’s States with the Best and Worst School Systems. The rankings find some correlations between spending and outcomes on achievement, safety, and other factors, with higher spending states generally achieving better outcomes than lower spending states.

The most extensive of the studies is the National Bureau of Economic Research working paper, The Effects of School Finance Reforms on the Distribution of Spending, Academic Achievement, and Adult Outcomes. This paper examines the impact of education spending shifts on educational attainment and long-term earnings of students affected by funding shifts.

The NBER paper finds that increases in spending on education for low-income children are not just correlated with improved outcomes; increased spending has a causal effect on outcomes. This is an important statistical finding.

Our results indicate that for children from poor families, increasing per-pupil spending by 20 percent for a child’s entire K–12 schooling career increases high school completion by 22.9 percentage points, increases the overall number of years of education by 0.928, increases adult earnings by about 24.6 percent, increases annual family income by 52.2 percent, and reduces the incidence of adult poverty by 19.7 percentage points. All these effects are statistically significant and are robust to a rich set of controls for confounding policies and trends. The magnitudes of these effects are sufficiently large to eliminate between two-thirds and all of the gaps in these adult outcomes between those raised in poor families and those raised in non-poor families. (p 44)

The paper does not find a similar effect of increased education spending for non-poor children.

Class and school size count

One of the reasons that spending has been controversial is that is has been difficult to determine exactly where spending makes a difference.

The Center for American Progress (CAP), which released three school finance papers this summer, examined the issue in two issue briefs. Parallel Lives, Different Outcomes compared “twin districts,” that is demographically similar districts in the same state, in terms of spending and outcomes measured as achievement on math and reading tests.

The paper found that some districts have much more local funding to invest than others, primarily because of variations in local property wealth. It also found that some districts get “a bigger bang for their education buck than others.” This finding is consistent with those reported in CAP’s Return on Education Investment: 2014.

Parallel Lives notes that it is difficult to sort out with available data which educational investments are most productive. For one thing, the paper acknowledges that its approach to productivity (math and reading scores) is a “very limited view of student outcomes.” For another, it was not possible to explore how districts differ in the programs and services they provide or in the classroom effectiveness of their teachers. Further, several district administrators reported that they have little flexibility in how they spend available funding.

Return on Education Investment: 2014 makes recommendations about how states and multi-state initiatives might begin to track and fund “productive” practices by generating new performance metrics, offering targeted grants and assistance teams, and working to build smarter and fairer school funding approaches.

The NBER paper also notes the difficulty of parsing out the effects of different types of spending on outcomes. It found that increases in spending were roughly proportional to allocation of funds on average, “suggesting that schools simply increased spending in all categories with little effect on the allocation of funds across categories.”

Despite these difficulties the NBER paper notes that “increases for instruction and support services (which includes expenditures to hire more teachers and/or increase teacher salary and also funds to hire more guidance counselors and social workers) are consistent with the large positive effects for those from low-income families.”

In addition, the NBER paper found that “Districts that experience a 20 percent increase in spending due to reforms see reductions in student-to-teacher ratios and school size. Both of these have been found to benefit students in general, with large effects for children from disadvantaged backgrounds.” The paper also notes that these districts reduced administrator and counselor-to-student ratios, mechanisms found in other studies to improve student incomes.

Inequalities in local wealth and implications for finance systems

CAP’s third recent school finance paper, America’s Most Financially Disadvantaged School Districts and How They Got that Way, explores the roots of inequities in funding and outcomes in the nation’s schools. It identifies the primary cause as “disparities in taxable property wealth.” These inequities arise for a variety of reasons beginning with the reality that some communities are quite wealthy and some are quite poor.

Four further conditions are identified as making matters worse. These include school finance formulas that fail to correct and sometimes worsen inequities, local tax and budgeting decisions and policies, housing segregation, and demographic shifts.

While the paper focuses on urban school districts, some of its recommendations for addressing inequities would also benefit rural districts, particularly those recommendations that directly address significant disparities in property wealth.

Many rural districts have few high-value commercial, industrial, or residential properties. As a result, even relatively high levels of taxation cannot yield significant revenues. The CAP paper proposes several remedies that might help both urban and rural low-wealth districts. One of these is to tax most commercial and industrial property primarily at the state rather than local level, helping to equalize revenues across localities. Another proposed remedy would redress tax policies that effectively codify pre-existing inequities.

All the reports, in one way or another, point to the need to bring greater equity to the nation’s education funding and to ensure that all children, regardless of where they live, have access to the educational resources necessary for adult opportunity.

The NBER paper states it this way: “The results [of this research] … highlight how improved access to school resources can profoundly shape the life outcomes of economically disadvantaged children, and thereby significantly reduce the intergenerational transmission of poverty.”

Read more:

Links to referenced papers:


National Bureau for Economic Research

Center for American Progress


Read more from the August 2014 Rural Policy Matters.