United States General Accounting Office

GAO Report to Congressional Requesters

December 1995 SCHOOL FINANCE

Three States’

Experiences With

Equity in School

Funding

GAO/HEHS-96-39

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-261604 

December 19, 1995

The Honorable Jeff Bingaman

The Honorable Christopher Dodd

The Honorable Paul Simon

United States Senate

Since the 1960s, the federal government has targeted educational funds to

areas of greatest need. For example, we commented on federal efforts to

award Elementary and Secondary Education Act grants to localities with

the greatest need.1

 More recently, the federal government has also

encouraged states and localities to develop high academic standards for

all school-age children. The system used to finance local schools within

each state can affect whether students in all districts can realistically

achieve such standards. In most states, these systems rely heavily on local

property wealth, which can vary greatly from district to district.

Since about 1989, more than half of the states have been involved in

lawsuits alleging that disparate access to education revenues violates the

state’s responsibility to provide for the education of all students. As a

result, many state legislatures have modified their school finance systems.

To better understand state school finance issues, you asked us to review

the experiences of selected states that had recently reformed their school

finance systems to make them more equitable. Specifically, for each state

selected, you asked us to characterize (1) the reforms to the school

finance systems and the legal, budgetary, and political pressures the state

legislature faced in making the revisions and (2) the general impact of the

legislative remedy, especially in addressing disparities in educational

funding. You also asked us to determine what advice state officials could

provide for other states similarly reforming their school finance systems.

To answer these questions, we conducted case studies of three

states—Tennessee, Texas, and Minnesota. (See app. I for a detailed

discussion of methodology.) In selecting which states to study, we first

asked experts in education finance to identify states that had implemented

finance equity reforms. Then, for each state identified, we contacted state

education officials or reviewed materials relevant to the state’s school

finance system to obtain information on finance formulas; school finance

legislation; revenue-raising strategies; and limitations, if any, on

1

See Title I Formula in S. 1513 (GAO/HEHS-94-190R, June 7, 1994) and Remedial Education: Modifying

Chapter 1 Formula Would Target More Funds to Those Most in Need (GAO/HRD-92-16, July 28, 1992).

Page 1 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

discretionary spending on local districts. We also considered each state’s

demographic makeup, reviewing such factors as the concentration of

poverty and public school enrollment and growth rates. We selected

Tennessee, Minnesota, and Texas for in-depth review because they had

recently reformed their school finance systems and differed substantially

from each other in (1) the approaches taken to revise their finance

systems and (2) such demographic factors as poverty and student

enrollment rates. Analyzing the school finance systems in three states with

such broad variation increases the likelihood that findings common to all

three states would be relevant to others trying to make their school

finance systems more equitable. For each state selected, we reviewed

school finance documents and analyzed data on state budgets, student

demographics, and school district funding levels. We also interviewed a

variety of education officials, about 15 in each state, including legislators,

state finance and education officials, and representatives from statewide

education associations (see app. II for a list of the titles of the interviewed

officials). We conducted our study between April and October 1995 in

accordance with generally accepted government auditing standards.

Results in Brief Just as the federal government has targeted grants to localities with the

greatest need, some states have been taking steps toward making school

funding more equitable among districts, often as a result of court-imposed

decisions. In the three states we studied, lawsuits led each state to address

disparities in education funding among districts. Texas had $14 million in

taxable property wealth per pupil in its wealthiest district, while the least

wealthy district only had $20,000 in taxable property wealth per pupil. As a

result of court action, Texas took a number of actions. For example, they

limited taxable property wealth per pupil to $280,000.

Legislative solutions following legal challenges in all three states lessened

disparities; they also helped poor districts without harming the education

programs in wealthy districts. For example, Minnesota increased the funds

available to low-property wealth districts and limited the local

contributions districts could make. However, provisions in Minnesota’s

school finance reform legislation allowed some wealthy districts to keep

what they had at the time of the legislation, even if it exceeded the new

limits. Solutions in all three states were also sensitive to public sentiments

about taxes. To build support for a sales tax increase to fund school

finance reform, for example, Tennessee included accountability provisions

in its legislation to ensure that any increase in spending would be used to

improve student learning. Tennessee’s small rural districts now have art

Page 2 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

and music teachers and can offer courses that will better prepare their

students for college.

All three states, however, have crafted solutions that may be subject to

change. In Texas, for example, the current solution includes a

state-imposed ceiling on property tax rates. This may make it difficult for

some districts to raise sufficient revenue for burgeoning populations of

educationally disadvantaged children, who characteristically cost more to

educate. In another example, Tennessee’s original solution to funding

disparities—which specifically excluded teacher salaries as an allowable

expense for the purpose of equalization—proved unsatisfactory to 77

small and rural districts. They felt that not being able to spend the money

on increases in teacher salaries made it difficult for them to attract and

retain teachers. Their lawsuit forced the 1995 legislature to include

increases in teacher salaries in the school finance plan, so far costing the

state $7 million.

Officials’ advice to other states undertaking similar reforms centered on

(1) clearly defining the equity goals of the school finance system in terms

of the funding needed to either provide adequate educational resources for

all students or to achieve a certain level of student performance,

(2) linking funding reform with greater accountability for student

performance, and (3) encouraging all groups affected by education finance

reform to participate in making the decisions.

Background Financing elementary and secondary education requires a large amount of

money; in school year 1993-94, total expenditures in all U.S. elementary

and secondary schools totaled an estimated $285 billion.2

 In most of the 50

states, education is the largest single expenditure category in the state

budget, accounting for 20.3 percent of total state spending in fiscal year

1994. Elementary and secondary schools receive most of their funds from

state and local revenues. Federal aid has mainly focused on providing

services to educationally disadvantaged children through categorical,

program-specific grants. In school year 1992-93, state and local shares of

education spending were almost equally divided at 45.6 percent (or

$113 billion) and 47.4 percent (or $118 billion), respectively, while the

federal share was 6.9 percent (or $17 billion).

2

Includes public and private elementary and secondary schools. For more information on education

spending, see School Finance: Trends in U.S. Education Spending (GAO/HEHS-95-235, Sept. 15, 1995).

Page 3 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

Funding Disparities Have

Led to Court Challenges of

Many State School Finance

Systems

Disparities in the distribution of education funds can occur because of the

method that states use to finance their public elementary and secondary

schools. In most states, localities provide a major share of school funding,

which is generally raised through the property tax (see table 1 for the

funding sources in the states we analyzed). Because property wealth is not

equally distributed among school districts, however, the heavy reliance on

the local property tax produces disparities in districts’ ability to raise

education revenues.

Table 1: 1994 Sources of Public

Elementary and Secondary School

Education Revenues

State revenue sources Local revenue sources

Minnesota Income tax

Sales tax

Motor vehicle excise tax

Corporate tax

Tobacco and alcohol taxes

Other miscellaneous taxes

Property tax

Tennessee Sales and use tax

Taxes on tobacco and mixed

drinks

General fund revenues from a

broad range of licenses, fees,

and other sources

Property tax

Optional sales tax

Texas Sales tax

Corporate franchise taxes

Oil and gas production taxes

Tobacco and alcohol taxes

Lottery proceeds

Interest and dividends

Educational endowment fund

Property tax

Since the early 1970s, these disparities have led poor districts in more than

40 states to challenge the constitutionality of their state’s school finance

system. More than half of the state systems have been challenged since

1989—some for the second time. In most cases less wealthy districts

charge that the state school finance system violated the state’s

constitution under one or two provisions—the education clause or the

equal protection clause.

Role of Education Clause or

Equal Protection Clause in

Lawsuits

All states have an education clause or some provision in their constitution

that requires the creation of a public school system. These clauses

vary—some simply call for the creation of an education system, and others

call for such systems to be, for example, “thorough and efficient” or

“general and uniform.” The courts in each state must interpret the

substantive meaning of such clauses, on the basis of their wording and

principles of statutory interpretation.

Page 4 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

Equal protection clauses in state constitutions require that all individuals

in similar situations be treated similarly. A suit brought under this

provision must allege that an individual is being classified, or treated

differently, by the state. In invoking the equal protection clause, claimants

may, for example allege that the state discriminated against low-property

wealth districts in providing education funds. In states where the highest

court has found public education to be a fundamental state right, a

standard of strict scrutiny applies. For a school finance statute to meet the

standard of strict scrutiny, the court must be satisfied that a compelling

government interest is at stake, a less discriminatory method to meet it

does not exist, and the classification in the legislation is necessary to

achieve a compelling government interest.

A Framework for School

Finance Equity

Determining the equity of a state’s school finance system, according to

school finance experts, requires policymakers to consider the following

four issues. First, policymakers must decide who is to benefit from an

equitable school finance system, taxpayers or public school students.

Second, the object that is to be equitably distributed must be determined.

These objects include educational revenues or key educational resources,

such as curriculum and instruction, or outcomes, such as student

achievement. Third, the principle to be used to determine whether the

distribution is equitable must be chosen. School finance experts have

identified four principles for defining equity: (1) horizontal equity, in

which all members of the group are considered equal; (2) vertical equity,

in which legitimate differences in resource distributions among members

of the group are recognized—for example, given childrens’ differences,

some students deserve or need more educational services than others;

(3) equal opportunity, also known as fiscal neutrality, which means that

differences in expenditures per pupil cannot be related to local school

district wealth; and (4) effectiveness, which assesses the degree to which

resources are used in ways that research has shown to be effective. The

effectiveness principle suggests that a resource inequity exists not only

when insufficient resources are available but also when resources are not

used in ways that produce desired impacts on student performance. The

fourth issue, according to experts, is to determine what statistic will be

used to measure the degree of equity in the school finance system. Many

statistical measures exist for this purpose; one such measure is the federal

range ratio.3

3

The federal range ratio is the difference between the values of the observations at the 95th percentile

and the 5th percentile, divided by the value at the 5th percentile. In percentage terms, the ratio

indicates how much larger the observation at the 95th percentile is than the observation at the 5th

percentile.

Page 5 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

Relationship Between

Spending and Student

Performance Unclear

Using the effectiveness principle to define equity requires knowledge of

the use of education dollars to achieve certain desired student outcomes.

However, the relationship among money, quality, and student achievement

is not well understood.4

 As a result, school finance experts report that

resources are not always used in ways that strengthen teaching and

learning. As an expert with the Education Commission of the States

recently suggested, better information is needed about what resources are

necessary to create successful schools, what programs and services are

valuable investments, and which ones result in the biggest payoff for

students.5

Lawsuits Spurred

Changes

All three states that we reviewed revised their school finance system at

least partly in response to lawsuits, although the suits’ outcomes differed

initially. In each state, less wealthy districts filed suit claiming that

disparities in the districts’ access to education revenues violated the state

constitution.6

 In Tennessee and Texas, the state supreme courts declared

the school finance systems unconstitutional; in Minnesota, the state

supreme court upheld the system because the disparities in revenue did

not preclude the plaintiff districts from providing an education that met

the state’s basic requirements.7

 Nonetheless, the Minnesota State

Legislature changed the system.

Lawsuits Focused on

Disparities in Access to

Revenues

The lawsuits in all three states focused on disparities in access to

revenues. The greatest such disparity was in Texas, where the most

wealthy district had $14 million in taxable property wealth per pupil, and

the least wealthy district had $20,000 per pupil. Revenue disparities

between the wealthiest and least wealthy districts were not necessarily

4

For an example of a study that found no relationship between education resources and student

performance, see E.A. Hanushek, “The Impact of Differential Expenditures on School Performance,”

Educational Researcher, Vol. 18, No. 4 (1989), pp. 45-51. For an example of a study that found a

positive relationship between such variables, see R.D. Laine, R. Greenwald, and L.V. Hedges, “Does

Money Matter? A Meta-Analysis of Studies of the Effects of Differential School Inputs on Student

Outcomes,” Educational Researcher, Vol. 23, No. 3 (1994), pp. 5-14.

5

M. Fulton, “School Finance Must Support Education Reform,” State Education Leader, Vol. 13, No. 2

(1994), pp. 1-3.

6

Appendixes III through V provide a more detailed summary of school finance reform in each of the

three states, including a discussion of the court cases.

7

At issue in the lawsuit challenging Minnesota’s school finance system was the equity associated with

only 7 percent of the general education revenue available for elementary and secondary schools.

Page 6 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

due to the unwillingness of less wealthy localities to tax themselves.8 In

Minnesota, for example, the plaintiffs’ attorney said that the plaintiffs’

analysis showed that the wealthiest 10 percent of districts in 1989 raised

on average six times more revenue through a levy program than the

poorest 10 percent even though tax rates for the poorest districts were on

average 25 percent higher.

In Tennessee and Texas, the courts found that the differences in taxable

wealth among districts created disparities in spending per pupil, which in

turn led to such disparities in educational opportunities that some districts

could not meet the state’s basic education course requirements.9

 For

example, in Tennessee, the disparity in total current funds available per

pupil in 1987 (1 year before the lawsuit) meant that some districts spent

more than twice as much as others—$1,823 per pupil compared with

$3,669 per pupil. The disparity in funding, the Tennessee court concluded,

deprived students in the plaintiff schools of equal access to adequate

educational opportunities such as laboratory facilities; computers; current

textbooks; buildings; and music, art, and foreign language courses.10

Only one court of the three—the Tennessee Supreme Court—linked

inadequate funding of the plaintiff schools and educational outcomes.

When the Tennessee suit was filed, only 7 percent of the elementary

schools and 40 percent of the secondary schools in the state’s 10 poorest

districts were accredited by the Southern Association of Colleges and

Schools, compared with 66 percent and 77 percent, respectively, of the 10

richest districts. Students in the plaintiff schools, the court observed, had

poor standardized test results and a higher need for remedial courses in

college.

Course of Lawsuits Varied

Among States

In Texas and Tennessee, the state supreme courts initially found the

states’ school financing systems unconstitutional; subsequent legislative

action led the state supreme courts to eventually uphold the revised

finance systems as constitutional. Before the Minnesota Supreme Court’s

finding the school finance system constitutional, the legislature had

8

School districts have taxing authority in Minnesota and Texas; counties and cities have such authority

in Tennessee.

9

Such disparities were not an issue in Minnesota, where the plaintiff districts stipulated that their

district schools met the state’s basic education requirements.

10See also School Facilities: America’s Schools Not Designed or Equipped for 21st Century

(GAO/HEHS-95-95, Apr. 4, 1995).

Page 7 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

already made further changes to equalize more of the state education

revenue. (See table 2.)

Table 2: Key Characteristics of State

Lawsuits

Year lawsuit filed

Year of court

decision

State supreme court decision on the

constitutionality of the school finance system

Minnesota

1988 1993 Constitutional—complete funding equalization was

not required, and permitting wealthy districts to

augment revenues did not violate equal protection

requirements.

Tennessee

1988 1993

1995

Unconstitutional—the state failed to provide

substantially equal education opportunities.

Constitutional—equalization may happen over

several years, but equalizing or increasing teacher

salaries should be part of plan.

Texas

1984 1989

1991

1992

1995

Unconstitutional—the concentration of funding

resources—property wealth—violated the

constitution.

Unconstitutional—legislative remedy failed to

change the structure of the funding system.

Unconstitutional—legislative remedy violated the

state constitution to not impose a statewide

property tax.

Constitutional—legislative remedy changed funding

system from one based on property wealth to one

based on tax effort.

Regarding the two states whose systems the courts found

unconstitutional, the Texas court’s judgment was more prescriptive: It

called for districts to have substantially equal access to similar revenue

per pupil at similar levels of tax effort. This ruling followed the court’s

finding that a concentration of resources in very wealthy districts taxing at

low rates should not exist while less wealthy districts taxing at high rates

cannot generate enough revenue to meet even minimum educational

standards. Holding that the state’s school financing system violated a

provision of the state constitution requiring educational efficiency, the

court concluded that districts must have substantially equal access to

similar revenue for similar levels of tax effort—regardless of property

wealth. The Tennessee court found that the school finance system failed to

Page 8 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

provide substantially equal educational opportunities to all students,

leaving it to the legislature to devise a remedy.

Legislative Remedies

Sought to Lessen

Revenue Disparities

The remedies developed by the legislatures used one or more of the

following options: (1) added new money to the school finance system to

increase funding in poorer districts (“leveled up”), (2) redistributed the

available resources by modifying the school finance formulas, (3) limited

the local revenues in very wealthy districts (“leveled down”), or

(4) recaptured local revenue from wealthy districts and redistributed it to

poor districts. Each state approached crafting its solution differently (see

table 3 and apps. III, IV, and V).

Table 3: Remedies Differ Among

States Remedy Texas Tennessee Minnesota

Raised new revenue to increase

funding in poorer districts

X

Redistributed the available

resources by modifying the school

finance formula

X X X

Limited the ability of districts to

raise local funding

X X

Transferred local revenue from

wealthy districts to poor districts

X

Note: This table is based on the legislative remedies found to be constitutional by state supreme

courts.

Tennessee Raised New

Revenues and Initiated

New School Finance Plan

Of the three states in our study, only Tennessee raised new revenues to

improve access to revenues (leveled up), without placing limits on local

contributions to education. Tennessee also revised its funding formulas by

enacting a new school finance program in 1992. The program funded local

school districts on the basis of the cost of providing a basic education11

and determined the local share of this cost on the basis of a locality’s fiscal

capacity.12 To finance the estimated $665 million needed to fund this

11Tennessee has determined that the essential components needed for a basic education include

teachers for regular education, special education, and vocational programs; support staff, such as

principals, librarians, counselors, and social workers; classroom items, such as textbooks,

instructional materials, and technologies; and nonclassroom support associated with central office

functions, pupil transportation, plant operation and maintenance, and capital outlay.

12Tennessee uses a regression model to estimate the fiscal capacity of counties. Factors in the model

that determine local fiscal capacity include tax base, ability to pay, resident tax burden, and student

population. In counties with more than one school district, each school district pays as much of its

total basic education costs as the county is required to pay of its total costs for basic education.

Page 9 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

program, the Tennessee State Legislature passed a half-cent increase in its

state sales tax and earmarked the new revenues for education. Under this

program, every district received more funding per pupil than it would have

under the old system, with less wealthy districts, as measured by their

fiscal capacity, receiving proportionately more than wealthy districts.

Texas and Minnesota

Redistributed State Funds

and Limited Local

Revenues

Texas and Minnesota redistributed state funds by changing the funding

criteria in state aid formulas to favor low property wealth

districts—without raising new state revenues. For example, Texas agreed

to provide additional state aid to those districts whose per pupil property

wealth was below $205,50013 and who were willing to raise their property

tax rate above the minimum required—$.86 per $100 of property

value—up to a maximum of $1.50 per $100 of property value. Similarly,

Minnesota chose to increase its aid to districts with low property wealth

by agreeing to equalize a portion of the amount that districts raised

through their optional operations levy.14

Furthermore, both Texas and Minnesota chose to limit local contributions

(leveled down). In Minnesota, one education finance committee legislator

said that the limit placed on levy revenue was as much a response to tax

relief demands as it was an equalizing measure. In Texas, however, where

property wealth of districts varied greatly, legislators set limits to meet the

court mandate of “substantially equal access to similar revenue per pupil

at similar levels of tax effort.” The state could not afford to close the

disparity in access to revenues by leveling up the revenue in less wealthy

districts. The state, therefore, limited local contributions in two ways.

First, the legislature limited the amount of revenue available to districts by

“capping” the property tax rate at which localities could tax themselves.

Second, the state chose to limit the taxable property value available per

pupil to $280,000. Districts whose per pupil property values exceeded this

threshold could choose one of five options to reduce their taxable wealth

(recapture provision). Very wealthy districts generally chose one of two

options to reduce their taxable wealth—writing a check to the state or to a

less wealthy district.

13In 1995, the Texas State Legislature increased the per pupil property wealth ceiling from $205,500 to

$210,000.

14The amount equalized is equal to 10 percent of the entitlement per pupil guaranteed by the state.

Page 10 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

Reforms Reflected

Many Pressures

The legislative reforms had to account for budgetary and political

pressures. Budget pressures were related to competing demands of other

budget sectors and to the growing student populations with special needs.

The political pressures were related to concerns about the reforms’ impact

on taxes, the funding levels of high-spending districts, and maintaining

local control of schools. In response to such pressures, legislatures in each

state included hold-harmless and win-win provisions.

Medicaid, Corrections, and

Growing Populations of

Special Needs Students

Exerted Budget Pressures

Legislators had to negotiate changes to state finance systems in a fiscal

environment in which education and other costs were growing rapidly. On

the basis of our analysis of state budget data, we found that Medicaid and

corrections expenditures in all three states had grown substantially in the

years before and during education finance reform. Medicaid spending had

more than doubled in each state during that period. Although corrections

spending had increased in all states, Texas’ corrections spending

increased most dramatically—by 135 percent from 1991 to 1995. We also

found that these three states had similar education-related budget

pressures from growing populations of special needs students, such as

those requiring remedial and bilingual programs and those with

disabilities, who are traditionally more expensive to serve.

Concerns About Taxes,

Funding Levels, and Local

Control of Schools Exerted

Political Pressures

Other pressures were essentially political, reflecting the public’s antitax

sentiments and concerns for local education programs and for local

control.

Solutions Reflected Tax

Concerns of Public

In all three states, the reform process reflected the public’s antitax

sentiment, which precluded some proposed solutions. For example, in

Tennessee, attempts to increase revenues for schools by implementing a

first-time, broadly based income tax were defeated. Likewise, a statewide

property tax in Texas was defeated. The solutions that were adopted also

reflected antitax sentiments. To build the business community’s support

for a half-penny increase in Tennessee’s sales tax to fund finance and

other education reform, for example, the legislature included

accountability measures ensuring that the new money would be used to

purchase resources deemed important to improving education. Minnesota

legislators limited the amount of per pupil revenue raised through a levy

program based on property tax to be more fair to property owners as well

as to limit (level down) local spending on education.

Page 11 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

Win-Win Solutions Were

Crafted for Wealthy and Less

Wealthy Districts

Legislators had to respond to concerns from wealthy districts that sudden

reductions or limitations in revenue would unfairly harm their education

programs. As a consequence, Texas and Minnesota allowed hold-harmless

exceptions in some wealthy districts either temporarily or permanently.

These exceptions allowed districts to retain their educational revenues

(Minnesota) or keep spending levels at existing levels by raising taxes

(Texas). Similarly, a Tennessee legislator said that to build support for

passage of the new school finance law, it was important to show that all

districts would benefit from the new financing scheme.

State-Imposed Solutions

Maintained Local Control

Local control was another major concern to legislators in two states. In

Texas, consolidating tax bases among districts to facilitate sharing

property tax revenues was vehemently opposed by those whose

community identity was closely linked to district boundaries. Instead of

requiring tax base consolidation, the legislature ultimately encouraged it

as one of five options available to wealthy districts for redistributing their

excess wealth. Allowing for local control of spending was also important

in Tennessee, where the new school finance plan provided much more

flexibility in spending compared with the old.

Reforms Improved

Equity in Education

Funding and

Opportunities

Officials we interviewed reported that reforms to school finance systems

have improved equity for less wealthy districts in terms of access to

revenues, per pupil spending levels, or educational opportunities. Further,

state education finance reports and our analyses of district spending data

support their conclusion.

Officials in all three states reported improved access to revenues in less

wealthy districts. We analyzed Minnesota state school spending data and

found the following to support this view: in 1988, a less wealthy district

generated expenditures of $59.57 per pupil for every percent of tax levied,

compared with $84.98 per pupil for every percent of tax levied in a wealthy

district. By 1992-93, however, the per pupil expenditures for every percent

tax levied were essentially equal in less wealthy and wealthy districts.15 In

Texas, where the goal was to improve access to revenues by decoupling a

district’s education revenue from its property wealth, a legislative

analysis16 showed that tax effort rather than property wealth now explains

the greatest amount of variance in a district’s ability to raise revenues. In

1989, property wealth alone explained almost 70 percent of the variation in

15For this example, a less wealthy district is a district at the 10th percentile of relative wealth. A

wealthy district is a district just above the 90th percentile.

16Texas Legislative Budget Board, “Fiscal Size-Up 1994-95 Biennium, Texas State Services.”

Page 12 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

a district’s ability to raise revenue, while a district’s tax rate explained only

13.5 percent. By 1995, property wealth explained only about 23 percent of

the variation; tax effort explained almost 51 percent.

Both Texas and Tennessee reported diminished disparities in per pupil

spending levels across districts, meaning that spending had increased in

the less wealthy districts in each of these states. For example, a Tennessee

school finance report showed that the disparity in per pupil expenditures

between high- and low-spending districts dropped from 84 percent before

the implementation of the 1992 finance system to 74 percent 1 year after

implementation.17 In our analysis of Tennessee school district funding

data, we found that, the average total per pupil funding ($2,476) in the

small, rural districts involved in the Tennessee lawsuit in the fiscal year

before the 1992 implementation of Tennessee’s new school finance system

increased by 31.93 percent to $3,254 by fiscal year 1994-95. The remaining

school districts experienced a 23.10-percent increase in their average total

funding per pupil in the same period, with the average per pupil funding

increasing from $3,117 to $3,782.

In Texas and Tennessee, where disparities in educational opportunities

were such an issue that certain districts could not meet basic education

requirements, officials we interviewed reported improvements in the

learning opportunities for pupils in less wealthy districts. For example, in

Tennessee, a former legislator said that small, rural districts now have art

and music teachers, which they never had before, and can now offer

courses that will better prepare their students for college. A 1994-95

Tennessee Department of Education budget report shows that districts

spent the greatest share, about 80 percent, of the approximately

$275 million in new funds made available to date on classroom-related

expenses, particularly the hiring of new teachers to reduce kindergarten

through eighth grade class sizes.

Equity Solutions Are

Fragile and Prone to

Change

Although officials we interviewed noted improvements in equity and other

aspects18 of their state school finance systems, they also shared concerns

about their systems’ sustaining these gains. Further, because of ongoing

pressures from various interest groups, they observed that their revised

17In this example, the high-spending districts are at the 95th percentile and the low-spending districts

at the 5th percentile.

18For example, in addition to improvements in equity, Tennessee officials saw the adoption of a

cost-based financing scheme as a benefit of the new school finance system.

Page 13 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

systems already have been modified and are likely to face further

alterations. These officials noted the following concerns:

• continued reliance on local property taxes to finance education spending

may lead to a tax backlash,

• features in the finance formula may not allow districts with high numbers

of disadvantaged students to keep pace with rising educational costs, and

• districts may continue to press for changes in the school finance system.

Antitax Sentiment a

Growing Concern

Observations made by Tennessee officials were typical of those regarding

antitax sentiment. In Tennessee, where localities are required to pay a

prorated share toward the cost of their district’s basic education, a state

school board official questioned the willingness of localities to raise their

taxes to keep pace with rising expenses such as teacher salaries. One

Tennessee education official said that, to avoid raising property taxes to

pay for an increased local contribution, constituents may exert pressure to

change the formula to reduce the local share, which may make it more

difficult for the state to ensure the adequate and equitable financing of

education needs in all districts.

In Minnesota, state education officials reported that districts are finding it

increasingly difficult to pass optional levies to help pay for school

operations—even since 1991, when the state increased its equalizing aid to

districts that passed the levies. Minnesota officials view this development

as possibly exacerbating the disparities among districts’ access to

revenues.

Difficulties in Meeting

Increasing Educational

Costs

Officials in all three states expressed concern about the ability of their

state’s school finance system to meet growing educational costs. For

example, Texas education officials that we interviewed expressed concern

about the impact of limiting the tax rate to $1.50 per $100 of property

value. As more districts reach the $1.50 ceiling, their ability to increase

spending to meet increased costs will be severely limited unless the state

provides additional funding or the tax ceiling is raised. An official with an

association that monitors the equity of Texas’ school finance system said

that “such a ceiling may be especially burdensome in less wealthy districts

where the numbers of disadvantaged children with costly educational

needs are growing rapidly.” Similarly, an official with a large urban district

in Minnesota said that “the state’s cost adjustment factors are not

adequate to fund the educational services needed for its disadvantaged

Page 14 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

students.” He said that his district, which is experiencing large increases in

the number of disadvantaged children, “is considering suing the state to

obtain increased funding.”

Districts Continue to Press

for Changes

Districts dissatisfied with the revised school finance systems have used

legal or legislative means to change the systems. In a 1995 Tennessee

Supreme Court case challenging the constitutionality of the state’s new

school finance system, the Tennessee Small School Systems claimed that

the new funding scheme was unconstitutional because equalization would

occur over several years and the plan included no provision to equalize or

increase teacher salaries. In its February 1995 opinion, the state supreme

court upheld the plan’s constitutionality, accepting the state’s argument

that complete equalization of funding can best be accomplished

incrementally, but found that the plan’s failure to provide for the

equalization of teachers’ salaries was a significant defect which, if not

corrected, could put the entire plan at risk. The 1995 Tennessee State

Legislature has since appropriated $7 million of the estimated $12 million

needed to equalize increases in teacher salaries.

In Texas and Minnesota, which both placed limitations on local

contributions to education, officials reported that legislators face ongoing

attempts by wealthy districts to change the school finance system. For

example, according to officials in Texas, wealthy districts in Texas,

unhappy over the recapture clause in the revised school finance system,

convinced the Texas State Legislature to somewhat offset the payment

they must make. The 1995 Texas State Legislature modified the school

finance law to allow wealthy districts paying recaptured funds directly to

the state to reduce the amount owed by the lesser of 4 percent or $80 per

credit purchased.19 A Texas education advocate said that provisions such

as these subsidize wealthy districts at the expense of less wealthy districts.

Issues to Be

Addressed by States

Considering School

Finance Reform

Because many other states face the prospect of reforming their school

finance systems, we asked state officials what advice they had for other

states. We found three common themes among their recommendations:

(1) states should first clearly define equity goals in terms of the funding

level needed to ensure adequate learning resources for all students or the

funding needed to ensure a certain level of student performance, (2) states

should link school finance reform to accountability, and (3) the reform

19The amount owed is based on the cost to educate additional children in the wealthy district, which is

measured in attendance credits. Each credit purchased is added to the district’s average daily

attendance until the per pupil property wealth is no more than $280,000.

Page 15 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

process should be inclusive and encourage the participation of all groups

affected by such reform.

Clearly Define Goals of

School Finance System

Officials in all three states suggested that states clarify the equity goals of

a school finance system by defining such goals in terms of adequate

learning resources or student performance standards. The general concern

underlying this advice is that states need to know what they are

purchasing with their education dollars. Officials suggested, for example,

linking the amount of funding to either the level of resources needed to

adequately meet the educational needs of students or to a certain level of

student performance.

Link Finance Reform to

Accountability

Officials also urged states to use student performance standards to

provide accountability for increased spending on education. Officials said

that the accountability was needed to convince parents and taxpayers that

the increased spending would lead to improved student performance.

Include All Stakeholders in

Reform Process

In discussing and developing proposals to reform the school finance

system, the officials we talked to suggested including all interested parties

with a stake in education, such as parents, teacher unions, school officials,

and business community representatives. They also suggested that it is

important for members from the legislative and executive branches of

government and the different political parties to collaborate in crafting a

workable solution. Officials in all three states provided examples of how

they involved diverse groups in revising their school finance legislation.

For example, one Minnesota official said that because the property tax

system should work in conjunction with the education finance system,

members of the primary and secondary education finance committees

needed to include members of the legislature’s tax committees in drafting

proposals to change the education finance system.

Conclusions The experience of the three states we studied suggests that reforming

school finance systems to make them more equitable is complex and

difficult. Legislative solutions have had to be sensitive to taxpayers’

concerns about increased taxes and to concerns of wealthy districts that

want to maintain existing spending levels. When these concerns are

sufficiently considered to gain passage of finance reforms, disparities in

education funding can be reduced and educational opportunities in poor

Page 16 GAO/HEHS-96-39 States’ Equity Experiences
B-261604 

school districts improved. However, such negotiated solutions are fragile,

making efforts to achieve equity continuous and likely to require periodic

adjustments in school finance systems as student demographics and

economic conditions change.

Solutions may use several options to increase the education funding in

poor districts, such as generating new revenues or redistributing existing

revenues. In states that choose to generate new revenues, it appears to be

important to include accountability provisions to help convince taxpayers

that the new investment in education is worthwhile.

Agency Comments The Department of Education reviewed a draft of this report and had no

comments. In addition, we provided state-specific information to state

officials for verification and incorporated their technical suggestions as

appropriate.

We are sending copies of this report to appropriate House and Senate

committees and other interested parties. Please call Eleanor L. Johnson on

(202) 512-7209 if you or your staff have any questions. Major contributors

to this report are listed in appendix VI.

Linda G. Morra

Director, Education and

 Employment Issues

Page 17 GAO/HEHS-96-39 States’ Equity Experiences
Contents

Letter 1

Appendix I 

Technical Appendix

20

State Selection 21

Data Analysis 22

Interviews 23

Appendix II 

Officials Interviewed

for Case Studies

24

Appendix III 

Texas Case Study

28

Background 28

Disparities in Property Wealth and Access to Revenue Prompted

Lawsuit

29

Court Rejects Two Legislative Solutions 30

Current Approach Raises Less Wealthy Districts’ Access to

Funds, Limits Wealthy Districts’ Spending

31

More Equitable Funding and Greater Taxpayer Equity Cited as

Successful Outcomes

33

Officials Express Concerns That Inequities in State School

Finance System Could Reemerge

34

Appendix IV 

Tennessee Case Study

37

Background 37

Small, Rural Districts Sued State Over Funding Disparities 38

State Supreme Court Ruled Existing System Unconstitutional 39

Proposed Legislative Remedy Called for Increased Spending

Despite Growing Budget Pressures

40

Reforms Were Enacted Amid Legal and Political Pressures 41

Officials Cite Improvements as a Result of the Change 42

Concerns Remain Over Sustaining Equity in Funding 45

Appendix V 

Minnesota Case Study

48

Background 48

Disparities in Spending and Unequal Access to Revenue Prompt

1988 Lawsuit

49

Legislators Balance Competing Interests to Accomplish Levy

Equalization

50

Page 18 GAO/HEHS-96-39 States’ Equity Experiences
Contents

Finance Reforms Improve Equity, but Other Problems Emerge 52

Appendix VI 

GAO Contacts and

Acknowledgments

56

Tables Table 1: 1994 Sources of Public Elementary and Secondary

School Education Revenues

4

Table 2: Key Characteristics of State Lawsuits 8

Table 3: Remedies Differ Among States 9

Abbreviations

CPRE Consortium for Policy Research in Education

SB Senate Bill

Page 19 GAO/HEHS-96-39 States’ Equity Experiences
Appendix I 

Technical Appendix

The objectives of this study were to characterize, for each state reviewed,

(1) the reforms to the school finance systems and the legal, budgetary, and

political pressures the state legislatures faced in making the reforms and

(2) the general impact of the legislative remedies, especially in addressing

disparities in educational funding. We also determined what advice state

officials could provide for other states similarly reforming their school

finance systems.

To answer these questions, we conducted case studies of three

states—Tennessee, Texas, and Minnesota.20 We selected these states for

in-depth review because they had recently reformed their school finance

systems and differed substantially from each other in (1) the approaches

taken to revise their finance systems and (2) such demographic factors as

poverty and student enrollment rates.

For example, the three selected states collectively illustrate four different

strategies for equalizing education finances—increasing revenues,

redistributing revenues, limiting the contributions of localities to

education, and recapturing funds from wealthy districts and redistributing

them to less wealthy districts. With regard to demographic factors, the

1992 poverty rates in the three states ranged from 12.8 percent in

Minnesota to 17.8 percent in Texas, with the national rate at 14.5 percent.

The percent change projected in student enrollment from 1990 to 1993

ranged from 1.5 percent in Texas to 4.2 percent in Minnesota, with an

overall projected increase for the nation at 4.3 percent.

Analyzing the school finance systems in three states with such broad

variation increases the likelihood that findings common to all three states

would be relevant to other states trying to make their school finance

systems more equitable.

20For more information on national trends in education finance and the impact of state education

finance reforms on school district revenues and spending patterns, see the following articles:

Adams, Jacob E., Jr., “Spending School Reform Dollars in Kentucky: Familiar Patterns and New

Programs, But is This Reform?” Educational Evaluation and Policy Analysis, Vol. 16 (Winter 1994).

Goertz, Margaret E., “The Equity Impact of the Quality Education Act in New Jersey,” Rutgers

University, Consortium for Policy Research in Education (New Brunswick, N.J.: 1995).

Monk, David H., “Resource Allocation in Schools and School Systems” In International Encyclopedia

of Education, Economics of Education Section (Oxford, England: 1992).

Odden, Allan R., “Trends and Issues in American School Finance,” Rutgers University, The Finance

Center of the Consortium for Policy Research in Education (New Brunswick, N.J.: 1994).

Picus, Lawrence O., “Texas School Finance Equity After Edgewood,” Rutgers University, The Finance

Center of The Consortium for Policy Research in Education (New Brunswick, N.J.: 1995).

Page 20 GAO/HEHS-96-39 States’ Equity Experiences
Appendix I 

Technical Appendix

For each state selected, we reviewed school finance documents and

analyzed data on state budgets, student demographics, and school district

funding levels. We also interviewed 15 to 19 individuals in each state who

represented a variety of education interests (see app. II). In conducting the

case studies, we primarily relied on the opinions of the officials we

interviewed and the supporting documentation they provided.

State Selection To select states to study, we first asked experts in education finance to

identify states that had implemented finance equity reforms. Then, for

each state identified, we contacted state education officials or reviewed

relevant materials on the state’s school finance system to obtain

information on the state’s finance formulas, school finance legislation,

revenue-raising strategies, and limitations, if any, on discretionary

spending on local districts. We also considered each state’s demographic

makeup, reviewing such factors as the concentration of poverty and public

school enrollment and growth rates.

We asked six national education finance experts21 to nominate states that

had revised their school finance systems to address inequities in spending

and had begun to implement the revised systems. The experts collectively

nominated 18 states: California, Florida, Indiana, Kansas, Kentucky,

Massachusetts, Maryland, Michigan, Minnesota, Missouri, Nebraska, New

Mexico, South Carolina, Tennessee, Texas, Vermont, Washington, and

Wisconsin.

To further refine the selection of states, we contacted state education

finance officials or reviewed relevant materials on the state’s school

finance system to determine the following for each nominated state:

(1) when the state passed legislation to equalize education spending,

(2) the revenue sources used to finance the equalization effort, (3) the type

of allocation formula used to distribute funds to the state’s public schools,

(4) whether the state operated under a tax or spending limit, and

(5) whether any limits were placed on local contributions to education. We

also used the most recent U.S. Department of Education National Center

for Education Statistics data to obtain the 1990 and 1991 state, local, and

federal share of education spending in each state.

21Kathy Christie, Education Commission of States; Mary Fulton, Education Commission of States;

Margaret Goertz, Consortium for Policy Research in Education, Rutgers University; Allan Odden,

Consortium for Policy Research in Education, University of Wisconsin-Madison; Lawrence Picus,

Center for Research in Education Finance, University of Southern California; Terry Whitney, National

Conference of State Legislatures.

Page 21 GAO/HEHS-96-39 States’ Equity Experiences
Appendix I 

Technical Appendix

Using this additional information, we first reduced the 18 states to 8 using

the following criteria:

• To ensure that state officials would be able to recollect the circumstances

surrounding the passage of the school finance reform legislation, we

eliminated eight states that either had not passed such laws or had passed

them before 1990: California, Florida, Maryland, New Mexico, South

Carolina, Vermont, Washington, and Wisconsin.

• To ensure that school finance reforms had been in place long enough to

allow us to study their effects, we eliminated one state (Michigan) where

voters had only recently (March 1994) approved an increase in the general

sales tax to fund a new school finance system passed by the legislature in

December 1993.

• To ensure that we would study states that were not already the subject of

many studies22 and on the advice of one of the six experts, we eliminated

one state (Kentucky).

Of the remaining eight states, we then judgmentally selected three that

differed in their approaches to equalizing their school finance systems and

differed substantially among certain demographic factors. We used the

most recent Bureau of the Census data to obtain demographic information

such as the 1992 poverty rate, recent shifts in kindergarten through 12th

grade enrollment, and ethnicity.

Data Analysis For each state selected, we reviewed school finance documents and

analyzed data on state budgets, student demographics, and school district

funding levels. We analyzed (1) the state’s school finance system, laws,

formulas, and spending patterns; (2) equity lawsuits dealing with state

school finances; (3) state budget data for state spending and for education

to determine the budget pressures operating when the state was

considering school finance reform legislation; (4) student demographic

data to identify any relevant trends in target populations, such as special

education students, whose educational costs may be generally higher than

average; and (5) school district spending data to verify where possible the

impact new reforms have had on reducing funding disparities. We did not

attempt to determine what impact the school finance reform had on

improving student performance.

22See for example, J. Augenblick, An Evaluation of the Impact of Changes in Kentucky’s School

Finance Program, The SEEK Program: It’s Structure and Effects, prepared for the Kentucky

Department of Education by Augenblick, Van de Water, and Associates, 1991.

Page 22 GAO/HEHS-96-39 States’ Equity Experiences
Appendix I 

Technical Appendix

Interviews We interviewed 15 to 19 individuals in each state who represented a broad

array of interests in elementary and secondary education. Specifically, to

obtain information and opinions on the state’s effort to equalize education

funding, we interviewed legislators; officials in the state education agency

and the state board of education; state attorneys; state budget officials;

and representatives of statewide education associations, such as teacher

unions; associations for school administrators; and parent-teacher

associations. We also interviewed individuals knowledgeable of both the

plaintiffs’ and the states’ interests in the school finance equity lawsuits.

See appendix II for a list showing the affiliation and position of the

individuals we interviewed in each state.

The interviews were open ended. Major questions covered, but were not

restricted to, the following subjects: (1) the problems placing the biggest

demands on the state budget and their impact on funding for kindergarten

through 12th grade education in general and, specifically, on the school

funding scheme; (2) within the kindergarten to 12th grade education

budget, what programs have been placing the biggest demand on the

state’s education budget, and what has been these programs’ impact on

public schools funding; (3) their satisfaction that the current education

finance system provides an adequate education for all students; (4) their

satisfaction that the current finance system provides for a more equitable

distribution of state education funds; (5) the legal, political, and economic

constraints that challenged state policymakers in developing the funding

and allocation system and the way policymakers dealt with those

constraints in developing the system; (6) the intended financial outcomes

of the new school finance system and the extent to which the state has

succeeded in achieving these outcomes; (7) the trade-offs that resulted or

are anticipated from implementing the new finance system; and (8) advice

for states that are trying to revise their school finance system.

Page 23 GAO/HEHS-96-39 States’ Equity Experiences
Appendix II 

Officials Interviewed for Case Studies

To conduct our case study, we interviewed the listed officials associated

with the following state agencies and offices and education associations:

Minnesota Minnesota House of Representatives

• Member of the Education Committee and K-12 Finance Division of the

Committee

• Former Chair of the K-12 Education Finance Division of the Education

Committee and member of the Ways and Means Committee (currently

director of the St. Paul Children’s Initiative)

• Ways and Means Fiscal Analyst/Education Finance

• Research Staff K-12 Education

Minnesota State Senate

• Vice Chair, Education Committee, and Vice Chair, Education Funding

Division

Minnesota Department of Education

• Director of Finance

• Assistant Commissioner

Minnesota Department of Finance

• Team leader for Human Development Programs

• Executive Budget Officer

Minnesota Office of the Attorney General

• Assistant Attorney General

University of Minnesota, College of Education

• Professor, Department of Educational Policy and Administration

Minneapolis Public Schools

• Executive Director for Policy and Strategic Services

Minnesota Parent Teachers Association

Page 24 GAO/HEHS-96-39 States’ Equity Experiences
Appendix II 

Officials Interviewed for Case Studies

• President-Elect

Coalition for Education Reform and Accountability

• Executive Director

• Former Director of the Minnesota Business Partnership

Schools for Equity in Education (formerly the Association of

Stable and Growing School Districts)

• Executive Director

• Legislative Analyst

Association of Stable and Growing School Districts

• Plaintiffs’ Attorney

White Bear Lake School District

• Superintendent of Schools

Tennessee Tennessee House of Representatives

• Chairman of the House Education Committee

Tennessee Senate

• Current Chairman of the Senate Education Committee

• Former Chair of the Senate Education Committee and current lobbyist for

the Tennessee School Systems for Equity

Tennessee Advisory Commission on Intergovernmental Relations

• Executive Director

Tennessee Department of Education

• Commissioner

• Assistant Commissioner

Tennessee State Board of Education

Page 25 GAO/HEHS-96-39 States’ Equity Experiences
Appendix II 

Officials Interviewed for Case Studies

• Executive Director

• Executive Assistant

Tennessee Department of Finance and Administration

• Budget Coordinator

• Administrative Budget Analyst

Tennessee Office of the Attorney General and Reporter

• Solicitor General

• Associate Solicitor General

Tennessee Organization of School Superintendents

• Executive Director

Tennessee School Board Association

• Deputy Executive Director

Tennessee Education Association

• President

• Executive Director

• Research Manager

Superintendent of Crockett County Schools and former head of

Tennessee Small School Systems, the group representing the

plaintiff districts in the 1988 lawsuit

Texas Texas House of Representatives

• Former legislator who chaired the House Public Education Committee

Texas State Senate

• Former senator who chaired the Senate Education Committee

Texas State Legislature, Legislative Budget Board

Page 26 GAO/HEHS-96-39 States’ Equity Experiences
Appendix II 

Officials Interviewed for Case Studies

• Manager, Public Education

Texas Education Agency

• Associate Commissioner, Chief of Operations

• Chief Legal Counsel

• Coordinator, School Finance and Fiscal Analysis

Texas Attorney General Office

• Chief, General Litigation Division

Texas Association of School Boards

• Associate Executive Director for Research and Development

Texas Center for Educational Research

• Director

Texas State Teachers Association

• Director

Texas Association of School Administrators

• Executive Director

• Assistant Director

The Equity Center

• Executive Director

• Director of Member Services

Moak Consulting

• Principal of Moak Consulting

Page 27 GAO/HEHS-96-39 States’ Equity Experiences
Appendix III 

Texas Case Study

The Texas Supreme court held in 1989 that the state school financing

system, which relied heavily on local property taxes, was unconstitutional.

Since 1989, school finance issues in Texas have been dominated by

legislative attempts to provide districts greater equity in their ability to

raise revenue. The courts rejected two approaches passed by the Texas

State Legislature before accepting a third, which has been in place since

1993.

Key characteristics of the new approach are (1) a mechanism for

equalizing property wealth among districts and (2) revenue limits for all

districts through a cap on property tax rates.23 Included in the approach is

transferring part of wealthy districts’ property tax revenue to less wealthy

districts. Districts were given a choice of five options for disposing of

excess wealth. Most chose to simply write a check to the state. Caps were

also placed on property tax rates. Finally, the level of state support to

districts was linked to a formula that accounted for the districts’

revenue-raising ability and tax effort.

Texas officials interviewed, who included former legislators, state

officials, educators, and others involved in the years of legal and political

controversy and the results that followed, believed that the new system

has achieved greater equity. However, they also cite several concerns that

could undermine the state’s efforts to achieve equity, such as taxpayer

resistance to the higher property taxes that have resulted.

Background Funding for the 3.6 million students in Texas’s 1,046 school districts

totaled $19.5 billion in school year 1993-94. Of this, $17.3 billion was

budgeted by local school districts. The largest share of the

district-budgeted revenue, 50.4 percent, came from localities. The

remainder came from the state (41.6 percent) and the federal government

(8 percent). Part of the remaining $2.2 billion was used for items not

budgeted by local districts such as textbook purchases and state matching

contributions to the teacher retirement fund; the remainder was due to

district underbudgeting of the revenue they actually received. Between

1985 and 1995, local funding increased by 117 percent, while state funding

increased by 60 percent.

At the state level, elementary and secondary education is the largest item

in the state budget (about 26 percent in fiscal year 1994). The primary

23A cap on property tax rates that existed before the finance reform was modified by the legislature in

1993 and 1995, according to officials.

Page 28 GAO/HEHS-96-39 States’ Equity Experiences
Appendix III 

Texas Case Study

source of state revenue for education is the sales tax; taxes on oil and gas

production, corporation franchises, and tobacco and alcohol; lottery

proceeds, interest and dividends, funds from the Available School Fund,24

and other state fees and taxes provide the rest of the education revenue.

At the local level, virtually all of the revenue is raised through property

taxes.

Between 1990 and 1994, total expenditures for elementary and secondary

education increased more than 34 percent. Much of this increase has been

used to offset the rapid growth in the school-age population and increases

in the number of special needs students. The cost of educating special

needs students is generally higher than the cost of educating children

without special needs.25 Texas has one of the largest and fastest growing

school-age populations in the nation. Between 1990 and 1994, the total

number of students increased from 3.3 million to 3.6 million (8.6 percent).

During that period, the number of special needs students increased at an

even faster pace: students participating in special education increased

almost 33 percent; students in bilingual programs increased almost

36 percent; and economically disadvantaged students increased more than

22 percent.

Disparities in

Property Wealth and

Access to Revenue

Prompted Lawsuit

In 1984, a group of less wealthy school districts filed a suit (Edgewood v.

Kirby) charging that the state’s heavy reliance on property taxes to fund

education resulted in expenditure differences that violated the Texas

Constitution. The districts argued that the disparity in districts’ property

wealth limited the ability of less wealthy districts to raise adequate funds.

After a trial in 1987 and appeals through the state court system, the Texas

Supreme Court in 1989 ruled that the finance system violated the

constitutional provision for an “efficient” system. The court noted that

glaring disparities existed in the abilities of less wealthy school districts to

raise revenues from property taxes because taxable property wealth

varied greatly by district. The wealthiest district had over $14 million of

property wealth per pupil while the poorest had about $20,000. Many less

wealthy districts were taxing themselves at a much higher rate than

wealthy districts but producing far less revenue. As a result, less wealthy

24The primary revenue sources of this fund are one-fourth of the state motor fuels tax and investment

earnings from the Permanent School Fund, which is an endowment fund consisting of state lands, the

sale of lands, and royalty earnings.

25See School Finance: Trends in U. S. Education Spending (GAO/HEHS-95-235, Sept. 15, 1995) and

School Age Children: Poverty and Diversity Challenge Schools Nationwide (GAO/HEHS-94-132,

Apr. 29, 1994).

Page 29 GAO/HEHS-96-39 States’ Equity Experiences
Appendix III 

Texas Case Study

districts struggled to raise the revenue needed to fund programs that met

the state’s basic education requirements, while wealthy districts were able

to pay for a wide array of enrichment programs.

The court said, “a direct and close correlation between a district’s tax

effort and the educational resources available to it” must exist. The court

noted that although districts did not have to spend equal amounts per

student, they must have substantially equal access to similar revenues.

Court Rejects Two

Legislative Solutions

In response to the Texas Supreme Court decision, in June 1990, the

legislature passed Senate Bill (SB) 1, a reform measure that provided more

money for equalization but left intact the school finance system. Less

wealthy districts appealed, and, in January 1991, the supreme court struck

down SB 1, holding that the public school finance system still violated the

“efficiency” provision of the Texas Constitution. The court said that, while

SB 1 improved the school finance system, it still did not restructure the

system to ensure that less wealthy districts had substantially equal access

to revenue for similar tax effort. The court suggested the solution of either

consolidating school districts or district tax bases.

Everyone we interviewed said that consolidating school districts was not a

workable option because of negative public reaction. An official who was

involved with writing the school funding legislation said, “many citizens

see consolidation as a threat to local control and to the identity and

economic viability of their community.”

Rejecting the idea of consolidating school districts, the legislature created

a system that would partially consolidate only the tax bases. This measure,

SB 351, was signed into law in April 1991. It created 188 County Education

Districts, which were countywide taxing entities encompassing several

school districts with a cumulative property wealth no greater than

$280,000 per pupil. These districts were to levy state-mandated property

taxes and redistribute the revenues to their member districts on an

equalized basis. This time the wealthy districts appealed, and, in

January 1992, the Texas Supreme Court ruled that SB 351 was

unconstitutional because it (1) violated the state constitution provision

that prohibits a state property tax and (2) levied a school property tax

without local voter approval. The supreme court gave the legislature until

June 1993 to create a new school finance system.

Page 30 GAO/HEHS-96-39 States’ Equity Experiences
Appendix III 

Texas Case Study

When the legislature met in regular session in 1993, it submitted for voter

approval a constitutional amendment legalizing the major SB 351

provisions. In May 1993, Texas voters defeated the measure by a wide

margin. Then, with time running out and still trying to design a system that

would not force district consolidation, the legislature passed a new

measure, SB 7, in May 1993. In January 1995, the Texas Supreme Court

upheld SB 7’s constitutionality.

Current Approach

Raises Less Wealthy

Districts’ Access to

Funds, Limits Wealthy

Districts’ Spending

In developing a system that would meet the test of the state supreme

court, the legislature chose not to develop a solution that required a

further increase in state taxes, according to state officials and education

advocates. The legislature had been putting more money into the system to

address equity issues since the early 1980s and determined that to address

the court’s concerns, it would have to develop a solution that concentrated

on redistributing local funding. Complicating the ability to find additional

state dollars were rapid increases in expenditures for Medicaid and

criminal justice programs. Between 1991 and 1995, state spending for

Medicaid and criminal justice programs increased 117 and 135 percent,

respectively.

The measure passed by the legislature and approved by the supreme court

has several key features. It (1) creates greater equality in property wealth

among districts, (2) sets limits on local property tax rates, and (3) provides

supplemental state funding for less wealthy districts to equalize the

revenue received on their local taxes.

Part of Wealthy Districts’

Property Wealth

Transferred to Less

Wealthy Districts

The new mechanism in SB 7 that sets it apart from the other funding

systems rejected by the court is a recapture provision that creates greater

equality in property wealth among districts. This provision was enacted

because other options for closing the gap in spending between the wealthy

and less wealthy districts were limited, according to several people we

interviewed. Politically, they said, the state could not pursue

consolidation, and, financially, it could not raise the level of poor districts’

spending to that of wealthy districts. Because of the vast disparities in

property wealth, the estimated cost of the latter option was four times the

amount of the entire state budget.

The new provision, which took effect in 1993, required districts with

property wealth exceeding $280,000 per pupil to reduce their taxable

wealth to no more than that amount. Districts had five options for doing

Page 31 GAO/HEHS-96-39 States’ Equity Experiences
Appendix III 

Texas Case Study

so: (1) consolidating with another district or districts, (2) transferring

property to a poor district for taxation purposes, (3) purchasing

attendance credits from the state (in effect, writing a check to the state),

(4) contracting with another district to educate some of their students (in

effect, writing a check to the district), or (5) creating a taxing district by

consolidating the tax base with one or more other districts.

This provision affected 90 of the state’s 1,046 school districts in school

year 1993-94. Collectively, these districts had to reduce their property

wealth, using one or more of the options, resulting in the recapture of

more than $430 million in local property tax. Of these 90 districts, none

used options 1, 2, or 5; 61 used option 3, 22 used option 4, and 7 used a

combination of options 3 and 4.

SB 7 included a provision that allowed some of these districts to retain a

greater amount of taxable wealth for the next several years. The provision,

which expires in 1996,26 permits wealthy districts to maintain their

spending at 1992-93 levels and to retain enough property wealth to do so,

subject to certain limitations.27 This provision was included out of concern

that rapid reductions could harm student programs, according to a state

official.

Caps Placed on Property

Tax Rates

To further limit spending of the wealthy districts, SB 7 capped school

property tax rates at $1.50 per $100 of property value for all districts.

Districts may call elections to increase the $1.50 limit by local voter

authorization to no more than $2.00 for bonds and debt service.28

Level of State Support

Linked to Revenue-Raising

Ability and Tax Effort

Texas distributes state funds for public education through a two-tiered

system of formulas known as the Foundation School Program. Tier I, a

foundation formula, provides funds for meeting the state’s basic education

requirement. All districts are eligible to participate if they levy a property

26This provision was modified in the 1995 legislative session. The hold-harmless provision was

extended until 1998 for districts that select either option 2 or 3; for districts that select options 1, 4, or

5, the provision expires in 1996.

27Districts were allowed to retain the property wealth needed to produce 1992-93 spending at a tax rate

of $1.375 per $100 of property value in 1993-94 and $1.50 through 1995-96.

28The 1995 Texas State Legislature modified this limitation so that the $1.50/$100 property value tax

limit is for maintenance and operations with the additional $.50 for servicing debt on bonds with the

approval of the voters. The prior law limited both maintenance and operations and debt service to

$1.50.

Page 32 GAO/HEHS-96-39 States’ Equity Experiences
Appendix III 

Texas Case Study

tax of at least $.86 per $100 of property value.29 Tier II funding is designed

to provide additional funds to enrich the basic foundation program and to

offset the wealth of wealthy districts. Under the provisions of SB 7,

participation in tier II funding is limited to districts with per pupil property

wealth below $210,000.30 These districts can receive tier II funding if they

set their property tax rates above the level required for tier I funding—

between $.86 cents and the maximum of $1.50 per $100 of property value.

Under this arrangement, less wealthy districts willing to tax themselves at

higher rates will receive more state aid. Districts with per pupil wealth

above $210,000, which can raise more revenue with equal tax effort than

their counterpart districts below this level of per pupil wealth are not

eligible to receive tier II aid. Districts with per pupil wealth below $210,000

receive tier II aid in direct proportion to the degree to which they are

willing to raise their own tax rates.

More Equitable

Funding and Greater

Taxpayer Equity Cited

as Successful

Outcomes

State officials, former legislators, education advocates, and others we

interviewed were unanimous in saying that the new system had greatly

improved equity. They noted that compromises had to be made to increase

the level of funding available to poor districts while not forcing school

district consolidation across the state, but they said that the amount of

progress towards greater equity had been substantial. For example, when

the new system is fully implemented in 1999, the portion of unequalized

revenue in the system will have decreased from nearly 21 percent of all

state and local revenues in 1989 to less than 2 percent.31

Our interviewees regarded greater taxpayer equity as a significant

outcome of the new system. Under the system in place in 1989, wealthy

districts were able to raise large amounts of money at a low tax rate while

less wealthy districts—even if they were taxing themselves at a much

higher rate—could not raise the funds needed to provide an education

program that met basic requirements. They pointed to evidence that the

new system’s limitations on revenue raised through the property tax in

29The tier I formula also includes weights for factors beyond the control of the districts such as special

needs students and special adjustments that address the differences in the cost of education for rural

and urban districts.

30In 1995, the state legislature increased the per pupil property wealth ceiling for tier II participation

from $205,500 to $210,000.

31It has also been reported that Texas had made considerable progress in reducing the variation in per

pupil spending among school districts before enactment of the school finance system embodied in SB

7, particularly in the years 1988-89 to 1992-93. See Lawrence O. Picus, “Texas School Finance Equity

After Edgewood,” The Finance Center of the Consortium for Policy Research in Education,

August 1995.

Page 33 GAO/HEHS-96-39 States’ Equity Experiences
Appendix III 

Texas Case Study

wealthy districts and rewards to less wealthy districts for revenue raised

through tax effort were affecting that disparity. For example, in 1989, more

than 69 percent of the disparity among districts in per pupil revenue was

due to differences in property values; by 1999, when the system has been

fully implemented, almost 77 percent of the disparity will be due to

differences in tax effort, according to estimates.

Officials Express

Concerns That

Inequities in State

School Finance

System Could

Reemerge

While our interviewees cited accomplishments under the new system, they

also collectively identified four concerns about inequities in the school

finance system reemerging: (1) the continued heavy reliance on local

property taxes, (2) wealthy districts’ concerns about sharing their wealth,

(3) less wealthy districts’ concerns about continued differences in per

pupil spending, and (4) districts’ inability to meet rising costs.

Continued Reliance on

Property Taxes

The Texas school finance system continues to rely on the local property

tax for more than half of its total revenue—and under SB 7, local property

taxes have increased. Wealthy districts have had to increase their property

tax rates to offset the loss of state aid and maintain spending levels. In

addition, many less wealthy districts have also increased their taxes

because, under the tier II formula, the state rewards less wealthy districts

that raise property taxes by increasing their state aid. Between 1990 and

1994, the effective property tax rate statewide has increased more than

43 percent, from $.96 per $100 of property wealth to $1.38. In 1994,

94 percent of the districts had a total effective tax rate that exceeded $1.00

per $100 of property wealth.

Almost all of those interviewed said that the new system had been

designed to rely on the local property tax for most of its revenue to limit

state government’s costs. However, most officials expressed concerns

about the state’s reliance on the local property tax for such a large part of

public education and said that they were concerned about a public effort

to roll back tax rates in the future. In addition, in the fast-growing districts,

funds needed to build schools are competing with funds needed to

improve education programs, which decreases educational opportunity,

according to an education advocate.

Page 34 GAO/HEHS-96-39 States’ Equity Experiences
Appendix III 

Texas Case Study

Wealthy Districts’

Concerns About Sharing

Taxable Wealth

Wealthy districts are dissatisfied with this new system and have pressured

the legislature to make changes, according to state officials and education

advocates. For example, in 1995, the legislature changed the provision that

requires wealthy districts to reduce their taxable wealth. Under this

change, those districts that write a check to the state (option 3) may

reduce their costs through a discount and extend the hold-harmless

provision for an additional 2 years.32 In addition, the state is permitting

wealthy districts to retain the money paid for appraising their district’s

property when such an appraisal is required to meet the recapture clause

provisions. Continued pressure on the legislature to make changes that

benefit the wealthy districts contradicts state efforts to improve equity

between the wealthy and less wealthy districts.

Less Wealthy Districts’

Concerns About Continued

Differences in per Pupil

Spending

Officials also noted that the new system did not bring something that poor

districts had wanted—equality in per pupil spending with wealthy

districts. Once the system is fully implemented, in 1999, it will permit

wealthy districts to spend about $600 more per weighted pupil than less

wealthy districts. The state supreme court indicated in its first ruling that

although substantially equal yield for similar tax effort was required to

meet the test of efficiency, a per capita distribution or equal spending per

pupil was not. Despite the court ruling, however, the expected disparity in

spending may be too much, according to some education advocates, given

that $600 per pupil is a significant difference (for example, it equals

$15,000 per 25-student classroom) that could give students in wealthy

districts an advantage in financing educational opportunities.

Less Wealthy Districts’

Inability to Meet Rising

Costs

The effect of Texas’ school finance system has been to provide more

revenue for less wealthy districts while limiting the amount of revenue

available to wealthy districts. Most officials said that they thought that the

new system is achieving its goal—greater equity and more revenue for less

wealthy districts. However, they also said that they have concerns about

the system because of the statutory tax rate ceiling. As more school

districts reach the $1.50 ceiling, their ability to increase spending to meet

increased costs will be severely limited unless the state provides

32The reason for this change is that if the state collects the funds from the wealthy districts, rather than

gives the funds directly to less wealthy districts through another option, it provides an estimated

additional $35 million to allocate to districts throughout the state, according to a state official.

Page 35 GAO/HEHS-96-39 States’ Equity Experiences
Appendix III 

Texas Case Study

additional funding or the tax ceiling is raised.33 This current tax rate could

be particularly burdensome for fast-growing districts with large numbers

of minority and economically disadvantaged students. At issue is whether

these districts will be able to fund the costly services needed to meet

students’ needs. For example, in 1994, of the more than 445,000 students in

the 123 districts with the lowest per pupil property wealth, 80 percent

were minority students, 24 percent participated in bilingual programs, and

almost 70 percent were economically disadvantaged.

33The 1995 legislature changed the system to (1) increase the per pupil basic allotment from $2,300 to

$2,387, (2) increase the property wealth for tier II participation from $205,500 to $210,000, and

(3) modify the $1.50/$100 property wealth tax ceiling so that in effect the ceiling is increased,

according to a state official.

Page 36 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

In response to a suit filed by small, rural districts, a state court ruled in

1991 that Tennessee’s school finance system was unconstitutional, leaving

it to the legislature to devise a remedy. This ruling came when efforts were

already under way in the state to not only revamp the state’s school

finance system, but also to reform the management and academic

curriculum of the state’s public elementary and secondary schools as well.

In a budgetary environment in which health and correction costs were

increasing and facing political pressures to incorporate accountability and

maintain local control, the Tennessee legislature passed legislation in 1992

to reform the school finance system.

Motivated by a potential court-imposed solution, the legislature increased

the amount of state funds for education, funded it with a new half-cent

sales tax, imposed accountability provisions, and crafted what has been

described as a win-win solution that benefited all districts.

Legislators, state education officials, school district administrators, and

others we interviewed said that the state has improved the educational

opportunities of students in poor districts since 1992. Indicators of success

included reduced spending disparities among districts, a large share of the

funds going to classroom expenditures, and more educational

opportunities (richer curriculum). Officials also praised other aspects of

the revised school finance system, such as the cost-based approach to

funding education and the flexibility districts have to spend their funds.

However, officials we interviewed also identified several concerns dealing

with a growing antitax sentiment, teacher salary increases, limits on local

spending, the educational needs of the urban poor, and accountability. As

a result of a 1995 supreme court decision, the state has taken action to

finance teacher salary increases. Depending on how some of the other

concerns are handled, officials suggested that inequities in the state’s

school finance system may recur.

Background Spending for public elementary and secondary education in Tennessee

totaled $3.4 billion in fiscal year 1994. State contributions, the largest

share, amounted to 49.5 percent of the total, while local governments

contributed 40.6 percent, and the federal government contributed

9.9 percent.

Most of the state funding for education, including higher education, is

earmarked and primarily comes from Tennessee’s 6-percent sales tax, the

state’s single largest tax revenue. The state does not levy property tax and

Page 37 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

collects an income tax only on unearned income such as on stock

dividends.34 In fiscal year 1994, the sales tax amounted to about 65 percent

of education funding. Additional sources of state revenue for education

include other earmarked revenues, such as taxes on tobacco and mixed

drinks, and general fund revenues from a broad range of licenses, fees, and

other sources.

Property taxes and local sales taxes are the two major sources of local

district tax revenues for elementary and secondary education. In school

year 1993-94, property taxes accounted for 36.5 percent of local revenues

in support of public schools, and local-option sales taxes accounted for

28 percent. The local-option sales tax allows localities to raise the

6-percent sales tax rate by as much as 2.75 percentage points. The state

requires at least one-half of the local-option sales tax revenue to go to

education.

Small, Rural Districts

Sued State Over

Funding Disparities

In 1988, the Tennessee Small School Systems, representing 77 of the 139

districts35 in Tennessee, filed suit in chancery court against the state,

claiming that, because of disparities in funding, the state school finance

system violated the education clause and the equal protection

requirements of the state constitution. Frustrations arising from the state’s

slow pace in enacting school finance reforms prompted the lawsuit. Our

analysis of school year 1989-90 student data showed that districts involved

in the lawsuit tended to be poorer than those who were not involved

because the percentage of students eligible to participate in the free or

reduced-price lunch program in a plaintiff district averaged about

37 percent compared with about 30 percent in a nonlawsuit district.

However, almost 50 percent of Tennessee’s students eligible to participate

in the lunch program were in the nine large urban and suburban districts

that intervened on the state’s behalf out of concern for losing funding to

rural districts.

The plaintiff districts asked the court to declare the state’s school finance

system unconstitutional, to enjoin the state from acting under the

statutory school finance system, and to require the legislature to enact a

constitutional school finance system. In September 1991, the chancery

court ruled in favor of the small districts, finding that the school finance

system violated the equal protection provisions of Tennessee’s

34The income tax generated only 1.7 percent of the total state revenue available in fiscal year 1993-94.

35Tennessee systems are the local education agencies that operate elementary and secondary schools.

For consistency in reporting, we refer to systems as districts.

Page 38 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

constitution but delaying the effective date of its order until June 30, 1992,

giving the legislature an opportunity to correct constitutional deficiencies.

State Supreme Court

Ruled Existing System

Unconstitutional

The state and a group of urban and suburban district intervenors appealed

the 1991 chancery court ruling to the court of appeals, which reversed the

lower court order; the case was then appealed to the state supreme court

by the Tennessee Small School Systems. In 1993, the state supreme court

ruled that Tennessee’s school finance system was unconstitutional. The

court found that the state failed to show a legitimate state interest

justifying granting to some citizens educational opportunities that are

denied to others and, thus, held that the school finance system violated the

constitutional guarantee of equal protection.

The court found that the state equalized (that is, distributed funds on the

basis of educational costs and ability to pay) less than $60 million of its

$2.5 billion education expenditures and that none of the funds raised by

the local-option sales tax were equalized. As a result, substantial disparity

existed in the revenues available to the different school districts. In 1987,

the disparity in total current funds available per pupil showed that some

districts had more than twice as much as others—$1,823 per pupil

compared with $3,669. The court found that the disparity was due to the

state’s reliance on local governments to fund education and local

governments’ varying ability to raise sufficient revenues and not

necessarily due to an inadequate effort by localities to tax themselves.

School districts with more retail activity and higher property values and

commercial development had more funds to educate their children than

districts with less retail activity and lower property values. As one official

put it, “Not every county has a Wal-Mart.”

The disparity in funding, the court concluded, led to students in the

plaintiff schools not having equal access to adequate educational

opportunities, such as laboratory facilities; computers; current textbooks;

buildings; and music, art, and foreign language courses, some of which

were required by the state. Further, plaintiff schools had difficulty

retaining teachers, funding needed administrators, and providing sufficient

physical education and other programs.

The court linked inadequate funding of the plaintiff schools to their

educational outcomes. The court noted that, in the 10 wealthiest districts

for the 1988-89 school year, 66 percent of the elementary schools and

77 percent of the secondary schools were accredited by the Southern

Page 39 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

Association of Colleges and Schools compared with 7 percent and

40 percent, respectively, in the 10 poorest districts. The court observed

that graduates from accredited high schools have better success in college

acceptances. Students in the plaintiff schools, however, had poor

standardized test results and more need for remedial courses in college.

Proposed Legislative

Remedy Called for

Increased Spending

Despite Growing

Budget Pressures

While the case was pending in chancery court and well before the 1993

supreme court decision, legislative leaders began to develop a remedy,

building on the work of an ad hoc committee of statewide education

officials formed by the Tennessee State Board of Education and making

refinements as developed by officials in the Governor’s administration.

The committee had been analyzing Tennessee’s school finance system

since 1986, reported a State Board of Education official, and, by 1991, had

developed and refined recommendations for a system. This system,

termed the Basic Education Program, funded local school districts on the

basis of the cost of providing a basic education36 and determined the local

share of this cost on the basis of a locality’s fiscal capacity.37 Assuming the

state was responsible for funding about two-thirds of the total cost of the

program, the governor’s administration estimated, according to an

Assistant Commissioner for Tennessee’s Department of Education, that

the additional state funds required would be $665 million, to be phased in

over 6 years.

According to a budget coordinator in the state’s Department of Finance

and Administration, the call for increased spending on education came

when the state was facing budget pressures from Medicaid and

corrections. Enrollment growth was increasing Medicaid expenditures,

and a prison construction program was fueling corrections expenditures,

reported the budget coordinator. In our analysis of state budget data, we

found that Medicaid expenditures increased by 103.6 percent from fiscal

year 1988-89 to fiscal year 1991-92, while corrections expenditures

increased by 19.8 percent during this period. Further, the budget

coordinator said that demands to equalize the state’s school finance

36Relying in part on guidance from the Southern Association of Colleges and Schools, the committee

found that the essential components needed for a basic education included teachers for regular

education, special education, and vocational programs; support staff such as principals, librarians,

counselors, and social workers; classroom items such as textbooks, instructional materials, and

technologies; and nonclassroom support associated with central office functions, pupil transportation,

plant operation and maintenance, and capital outlay.

37Tennessee uses a regression model to estimate counties’ fiscal capacity. Factors in the model that

determine local fiscal capacity include tax base, ability to pay, resident tax burden, and student

population. A proportionate share of the costs of the Basic Education Program is assigned to each

school district on the basis of its county’s relative capacity.

Page 40 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

system posed the biggest education-related pressure on the budget for this

period. However, he also said that costs associated with serving special

education students—who were increasing at a faster rate than the general

student population—also placed some pressure on the budget. In support

of his opinion, we found that while Tennessee’s net enrollment increased

by 3.9 percent from 860,101 in school year 1987-88 to 893,272 in school

year 1991-92, the number of special education students increased by

18.4 percent—from 129,725 to 153,634 over this same period.

Reforms Were

Enacted Amid Legal

and Political

Pressures

In developing the specific legislation for the Basic Education Program,

legislators faced at least two major challenges: first, how to raise the

estimated $665 million needed in additional revenue to fully fund the

program (level up the financing) and, second, how to equitably distribute

funds among districts. In accomplishing these tasks, the legislature faced

legal and political pressures.

Potential Court-Imposed

Solution Spurred

Legislative Action

The chancery court ruling and possible further court action motivated the

Tennessee State Legislature to pass the Education Improvement Act,

which established the Basic Education Program and funded it using the

formula developed by the State Board of Education. The act also

restructured the management of schools, set new academic standards, and

mandated a new accountability system. The legislature then passed a

half-cent sales tax increase to finance the act.

Accountability Provisions

Countered Resistance

Regarding increased revenues, officials we interviewed, including key

legislators at the time the new laws were passed, talked about the

difficulty in convincing other legislators and members of the public that an

increase in education spending was needed. Among the opposition were

certain private education groups that believed any increase in funding for

public education was a waste38 and members of the business community

who opposed a sales tax increase with no guarantee that the funds would

improve education. Using an income tax to finance the plan proved not to

be a viable option because the Tennessee governor tried and failed, in a

special session, to pass what would have been the state’s first broadly

based income tax.

38See earlier comment in the “Background” section of the letter regarding the research that has

examined the relationship between school expenditures and student learning.

Page 41 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

Legislators and state education and other officials involved in crafting the

legislation said that the inclusion of accountability provisions and the

half-cent sales tax law were essential to passing the Basic Education

Program. They cited key financial accountability provisions such as

earmarking the revenue raised by the half-cent sales tax for education and

specifying that revenues could not be spent on increases in teacher

salaries—an expenditure many legislators believed was not linked to

improvements in learning. They said that despite some opposition from

teachers, school administrators, and some legislators, it was also

important to include programmatic accountability provisions which,

among other things, made local school officials accountable to the state

for school district performance. For example, the law gave the

Commissioner of Education power to remove from office local school

board members or superintendents of districts that failed by school year

1994-95 to meet performance goals in such areas as student attendance

rates and test scores. To facilitate this accountability, the law also required

all districts to elect local school board members who in turn would be

responsible for appointing a district superintendent. Districts previously

had used a variety of methods to elect or appoint their local school

officials.

Win-Win Solution Needed Another challenge entailed devising an equitable allocation system, given

that the state would not be at full funding for 6 years. The chair of the

House Education Committee said that it was important to show legislative

members that, with the increase in state spending, all districts, including

large urban districts, were better off than they would have been under the

old finance system. According to a state education official, the solution

entailed adopting a wage adjustment factor developed by the state

Department of Finance and Administration to ensure that the large, urban

districts received more money under the new system compared with the

old system. Then, because the money had to be phased in, the legislature

chose to distribute the new money according to how close a district was to

its full funding level. The farther away a district was from full funding, the

more new money it proportionately received compared with a district that

was closer to its full funding level.

Officials Cite

Improvements as a

Result of the Change

During our visit, Tennessee was in its third year of phasing in the Basic

Education Program and was funding 88.1 percent of the fully funded level,

$1.9 billion, for fiscal year 1994-95. Given this funding history, benefits of

the program cited most frequently by officials we interviewed included

Page 42 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

improved equity in the funding of poor districts compared with wealthy,

greater educational opportunities for all—and, particularly,

poor—districts, more flexibility in spending decisions at the local level,

and the introduction of a cost-based finance system. District funding and

expenditure data obtained from the state also indicate that inequities

lessened since passage of the new finance program.

Improved Equity in

Educational Funding

Tennessee’s Department of Education reports that the new school finance

system equalizes 94 percent of state funding to districts in support of

elementary and secondary education in fiscal year 1994-95 compared with

62 percent in fiscal year 1991-92 under the old system. The increase in the

amount of equalized funds has reduced the disparity in spending: the

Tennessee Advisory Commission on Intergovernmental Relations reports

that the disparity in per pupil revenues as measured by how much larger

the per pupil revenue in the district at the 95th percentile is than the per

pupil revenue in the district at the 5th percentile has declined from

83.9 percent before the enactment of the Education Improvement Act in

1992 to 73.6 percent after 1 year of Basic Education Program funding. The

commission estimated that the disparity will fall to 36.1 percent by 1997,

the year the Basic Education Program is fully funded.

We found that plaintiff districts benefited to a greater extent than the other

districts under the new financing program. In our analysis of Tennessee

school district funding data, we found that, the average total funding per

pupil in the 77 small, rural plaintiff districts has increased. In the fiscal

year before the 1992 implementation of the new finance program, the

average total funding per student was $2,476 in these districts. In fiscal

year 1994-95, the average was $3,254, an increase of about 32 percent. The

remaining school districts experienced a 23.10-percent increase in their

average total funding per pupil over that same period, with the average per

pupil funding increasing from $3,117 to $3,782.

The Tennessee Department of Education has been keeping track of how

the additional funding made available under the Basic Education Program

has been spent. In a 1994-95 budget report that accounts for about

$275 million of the new funding39 under the program, classroom

expenditures represented about 80 percent of the new money. Classroom

expenditures include the hiring of new personnel, such as teachers,

counselors, librarians, and principals, and the purchasing of supplies such

as textbooks, instructional materials, and technologies. Within this

39About 3 percent of the $275 million in new funding included reserves from the prior year.

Page 43 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

expenditure category, the largest single portion (about $100 million) was

spent on reducing class sizes in kindergarten through eighth grade by

hiring 2,999 new teachers. Nonclassroom expenditures accounted for the

remaining 20 percent of the new money, with about $25 million of the

amount going for the construction and renovation of classrooms.

Greater Educational

Opportunities, Especially

in Poor Districts

Nearly all the officials we interviewed indicated that the impact of new

money on small, rural districts has been significant. A former legislator

said that an estimated 70 to 80 small, rural districts can now provide

educational opportunities to their students that they could not offer

before. For example, he said that schools for the first time have art and

music teachers and can offer courses that will better prepare their

students for college. These improvements, in turn, will help enable such

schools to receive accreditation from the Southern Association of Colleges

and Schools.

More Local Flexibility The Tennessee Department of Education reported that the use of state

education funds has much more flexibility under the Basic Education

Program formula than it had under previous state funding programs.

Officials we interviewed, including two legislators, a small district

superintendent, and a state school board association official, agreed with

the Department’s assessment, citing flexibility in decisionmaking as a

benefit. The funding formula groups components of basic education into

classroom and nonclassroom categories. The formula’s only earmark is on

classroom funds, which must be spent on classroom components but not

necessarily on the specific classroom cost component that generated the

funds. As an example of the flexibility possible in local spending decisions,

a superintendent said that district officials may receive funding to hire a

nurse but instead may decide to use the funds to hire a teacher or

purchase technology or some other classroom-related item.

Cost-Based Finance

System

The old formula based its funding levels on appropriated amounts; the

new formula links funding to the costs of 42 critical components, such as

teachers and textbooks, associated with providing a basic education. The

Department of Education annually reviews and updates the components’

costs. One or both of these features—the inclusion of a wide array of cost

components and the annual review—were among the benefits cited by

officials we interviewed, including a Tennessee State Education Board

official, the Chair of the House Education Committee, and representatives

Page 44 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

of the state teacher union and school board association. As the State

Education Board official explained, the state now has a mechanism for

automatically increasing funding to meet increasing enrollment and cost.

He explained that, previously, funding for items, such as transportation,

had remained the same for a 6- to 8-year period, despite an approximate

33-percent increase in the school enrollment.

Concerns Remain

Over Sustaining

Equity in Funding

Although acknowledging improvements, officials we interviewed also

identified several concerns about the new school finance system. The five

concerns most frequently cited involved (1) the growing antitax sentiment

among property owners, (2) the exclusion of teacher salary increases from

the finance plan; (3) the lack of limits on local contributions; (4) the high

educational costs of poor, urban students; and (5) the new accountability

system.

Because of a lawsuit, the state has since modified its finance system to

include increases in teacher salaries. Depending on how concerns about

the antitax sentiment, the lack of limits on local spending, and the needs of

the urban poor are handled, some officials indicated that inequities in the

school finance system could recur.

Antitax Sentiment a

Growing Concern

Given that localities are required to pay a prorated share toward the cost

of their district’s basic education, officials we interviewed questioned the

willingness of localities to raise their taxes to keep pace with the cost of

components, such as teacher salaries, that are expected to increase over

time. As a state school board official explained, the Education

Improvement Act required schools to comply with reduced class sizes 4

years from the date of full funding for the new school finance plan. This

provision, he said, will create significant upward pressure on localities’

contributions, and counties will be dismayed when they learn how much

they will need to contribute to earn the state share. A state board of

education official said that, as a result, constituents would pressure their

state representatives to change the formula to avoid raising taxes to

finance their local contribution. If the local share were to be reduced, the

official said the state may find it more difficult to ensure the adequate and

equitable financing of education needs in all districts.

Program’s Failure to

Increase Teachers’ Salaries

Challenged

The Tennessee Small School Systems representing the 77 small, rural

districts who had filed the original 1988 lawsuit brought suit challenging

the provision in the Education Improvement Act that new funding under

Page 45 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

the Basic Education Program could not be used to increase salaries of

existing teachers. The plaintiffs contended that the new funding scheme

was unconstitutional because equalization would occur over several years

and the plan included no provision to equalize or increase teacher salaries.

In its February 1995 opinion, the state supreme court upheld the plan’s

constitutionality, accepting the state’s argument that complete

equalization of funding can best be accomplished incrementally but found

that the plan’s failure to provide for the equalization of teachers’ salaries

was a significant defect which, if not corrected, could put the entire plan

at risk. The court stated, “Teachers, obviously, are the most important

component of any education plan or system, and compensation is, at least,

a significant factor determining a teacher’s place of employment.”

Underscoring the importance of the program’s key provisions for funding

and governance, the court approved Tennessee’s Basic Education

Program. Since the court order, the 1995 Tennessee State Legislature has

appropriated $7 million of the estimated $12 million needed to equalize

increases in teacher salaries.

No Limits on Local

Spending Pose a Concern

Although the Education Improvement Act mandates a minimum local

contribution, it does not limit the amount of the contribution. A

superintendent of one of the plaintiff districts stated, “To impose caps to

limit local taxing authority in the name of equality or uniformity of

education has no place in a new [finance] system.” Other

officials—including a state attorney and a state legislator, however,

suggested that some districts may be very willing to contribute to their

local schools, and over time disparities between rich and poor districts

may again grow to some unacceptable level.

Educational Needs of

Urban Poor May Not Be

Met

Officials, including two state education officials and a state attorney,

indicated that the Basic Education Program formula may not adequately

address the needs of the urban poor who reside in counties with high

fiscal capacities. An official with the Tennessee Advisory Commission on

Intergovernmental Relations said that the formula makes no allowances

for the likely higher-than-average unit costs associated with serving the

educational needs of a large, dense population of students—many of

whom can be characterized as poor or at risk—in the urban districts.

Compounding the problem of not receiving perhaps adequate funding for

their students’ educational needs, he also said that urban districts have

relatively high fiscal capacities and therefore their state funding increases

have been proportionately smaller compared with the increases in districts

Page 46 GAO/HEHS-96-39 States’ Equity Experiences
Appendix IV 

Tennessee Case Study

with lower fiscal capacities, which are typically more rural. Finally, the

state does not have any requirement for counties to “weight” the

distribution of state or local funds to their school districts according to the

district’s share of poor or at-risk students in the county.

Some Accountability

Provisions Continue to Be

Challenged

Officials we interviewed expressed concern about the reaction of groups

affected by certain accountability provisions in the Education

Improvement Act. For example, the Chair of the House Education

Committee said that members of the legislature have made repeated

attempts to repeal provisions related to the election of school board

members and the board appointment of district superintendents. The

provisions in Tennessee’s pioneering new approach for measuring gains in

student performance—the Value Added Assessment System—also sparked

controversy. The new assessment system measures gains in student

performance in grades three to eight and compares them with national

average gains in those grades over the most current 3-year period.

Observations made by officials, including two state education officials, a

legislator, a teacher union representative, and a district superintendent

indicated that the new system is problematic—although a key legislator

said he believed the problems can be worked out. Problems cited by

respondents in our group included (1) difficulties in holding schools

accountable for achieving certain performance goals before the Basic

Education Program is fully funded; (2) premature student testing—that is,

conducting tests before students have had an opportunity to learn the

material; and (3) bad publicity caused by early results that only showed

small increases in better schools.

Page 47 GAO/HEHS-96-39 States’ Equity Experiences
Appendix V 

Minnesota Case Study

In 1988, 52 school districts with below-average property wealth sued the

state of Minnesota for providing—in alleged violation of the state

constitution—unequal access to education revenue and unequal education

opportunities. Unlike some other states, about 90 percent of Minnesota’s

education revenues were already subject to wealth- and need-based

equalizing formulas. At issue was about 7 percent of general education

revenue for elementary and secondary education.

Although the Minnesota Supreme Court ruled in 1993 that the finance

system was constitutional, the Minnesota State Legislature moved forward

with plans to equalize some of the remaining funding. To do so, legislators

had to balance three competing interests: (1) increasing funds available to

less wealthy districts, (2) dealing with growing pressures for tax relief

from business and other property owners, and (3) assuaging the concerns

of high-spending districts that they might lose revenue because of changes

to the system.

The legislature’s revisions have improved the fairness of the system,

according to almost all the officials and education advocates we

interviewed. However, issues that have emerged since the

revisions—districts’ ability to pass tax levies in an antitax environment

and the rapidly growing costs of educating children with special

needs—have created additional problems that may raise new concerns

about finance equity.

Background We determined that in fiscal year 1995-96, public school districts in

Minnesota were projected to receive more than $5.5 billion from federal,

state, and local sources. More than half of that was provided by the state,

and about 44 percent was provided by localities. The federal government

contributed the rest. Since fiscal year 1986, Minnesota has spent more on

primary and secondary education than it has on any other single major

state program, amounting to about one-third of most recent state

expenditures. Since 1983, the state’s share of total district revenue, relative

to local and federal contributions, has dropped below 50 percent only

once and has been as high as 55 percent. State appropriations for public

schools are funded primarily by statewide income and sales taxes. The

local contribution is funded primarily with local property taxes.

Understanding how Minnesota funds education helps to better explain the

pursuit of revenue equity in the state and how it differs from such pursuits

in states where much wider disparities existed. Elementary and secondary

Page 48 GAO/HEHS-96-39 States’ Equity Experiences
Appendix V 

Minnesota Case Study

schools receive the bulk of their general operating funds and levy

authority from the state through the General Education Revenue Program,

a program subject to wealth equalizing formulas. Nearly three-fourths of

the total state funding for elementary and secondary education is

distributed to school districts through this program. The remaining

one-fourth of the state’s appropriation is for special-purpose or categorical

aids, some of which also are wealth and cost based.

The General Education Revenue Program entitles each district to a

specified revenue allowance per pupil, with additional allowances

allocated on the basis of economic, geographic, and other cost-related

circumstances of the district. The “basic revenue allowance,” without the

cost-related adjustments, was $3,150 per pupil unit40 in fiscal year 1995-96.

The state pays the district the difference between what a district can raise

at a statewide tax rate41 and its basic revenue allowance.42 The proportion

of general education aid received by each district depends on the district’s

relative property wealth per pupil. A few very wealthy districts receive no

general education aid, while relatively poor districts receive most of their

general education revenue as state aid payments.

In addition, districts may also supplement this basic funding by

implementing a voter-approved operations tax levy.43 Revenue raised by

voter-approved operations levies constituted about 6 percent of total

district revenue in 1994. The optional operations tax levy was at the heart

of the dispute about funding equity.

Disparities in

Spending and Unequal

Access to Revenue

Prompt 1988 Lawsuit

As in Texas and Tennessee, a lawsuit prompted action to revise

Minnesota’s finance system. The suit was brought in 1988 by rapidly

growing school districts whose property wealth per pupil had dropped

below the state average. The suit alleged that the education finance system

violated two provisions of the state constitution: its education clause

(which requires a “general and uniform system of public schools”) and its

40Per pupil unit is a weighted count of resident pupils in average daily membership used in the

calculation of state aid and local tax levies.

41During our visit, this rate was 34.2 percent of taxable property wealth.

42At the statewide tax rate, a few property-rich districts raise levies in excess of the general education

allowance. The amount by which the general education levy exceeds the general education allowance

is deducted from other categorical aid to the district. A few districts raise more than their total general

education allowance plus categorical aids. These districts are allowed to reduce their tax rate and

receive no state aid.

43The state calls this “excess referendum revenue.”

Page 49 GAO/HEHS-96-39 States’ Equity Experiences
Appendix V 

Minnesota Case Study

equal protection clause (which provides that a citizen may not be deprived

of any right or privilege). This challenge was to a relatively small portion

of Minnesota’s funding structure because more than 93 percent of

Minnesota’s general education revenue already fell under wealth-and

cost-based funding schemes. Plaintiffs contended that the failure to

equalize the remaining 7 percent of this revenue left too much discretion

with local officials and permitted wealthy districts to generate much more

additional funding than low- or average-wealth districts. The lawsuit

challenged three types of state funding programs: (1) voter-approved

operations tax levy; (2) revenue guarantees typically benefiting

high-spending, wealthy districts; and (3) local debt service levy approved

by voters to finance bonds for school construction and renovation.

The court found that the constitutional requirement for a “general and

uniform system” of public schools does not mandate complete funding

equalization and that any inequities that existed did not actually violate the

constitution’s education clause. Nevertheless, the legislature continued to

implement revisions it had begun in 1991 to further reduce the disparities

between wealthy and less wealthy districts.

Legislators Balance

Competing Interests

to Accomplish Levy

Equalization

To improve fiscal equity in Minnesota, legislators said they found they had

to balance three competing interests: (1) increasing funds available to

low-property wealth districts, (2) dealing with growing pressures for tax

relief from business and other property owners, and (3) assuaging the

concerns of high-spending districts that they might lose revenue because

of changes to the system.

Legislature Equalizes

Optional Levy Programs

Unlike other states, where legislatures made significant structural changes

to the school finance system to affect equity, the Minnesota State

Legislature made minor changes within the existing system, education

leaders and state officials said. Legislative revisions principally focused on

voter-approved operations and debt service property tax levies. Beginning

in 1992, state aid was provided to equalize a portion of the optional

operations tax levies. It also began debt service equalizing aid that year.

The state’s tactic to improve equity in the levy programs was to calculate

an aid contribution per district in the same manner as it calculated the

state’s share of the district’s General Education Revenue. Equalizing aid

was provided to districts passing levies in a proportion similar to that

received by them under the equalized General Education Revenue

Page 50 GAO/HEHS-96-39 States’ Equity Experiences
Appendix V 

Minnesota Case Study

program. State aid was provided to equalize a portion of the optional levy.

Initially, only $305 per pupil unit raised by the voter-approved operations

tax levy was subject to this equalizing scheme.44 The debt service levy

equalization aid was phased in over 3 years, at a lower rate of equalization

than operations levies, and was made available only to districts whose

debt service exceeded 10 percent of their taxable base per pupil. The need

to provide additional revenue for some districts was complicated by other

pressures on the state budget, according to one former member of the

education finance committee in the Minnesota House of Representatives.

When these changes were being considered, the state also had growing

health care costs due to expanded coverage and enrollment growth and

growth in corrections costs due to harsher sentences and improved law

enforcement. We found that health care spending increased over

47 percent between fiscal years 1988 and 1991. Corrections spending was

up almost 42 percent in the same period.

Legislation Provides Tax

Relief

State legislative officials and education advocates said that education

finance negotiations included pressures from business interests and tax

reformers who wanted to make property tax relief part of education

finance reform. Of interest to business was the state’s property tax system,

which taxed different types of property used for different purposes at

significantly different rates. The lowest tax rates were applied to

agricultural property. The highest rates were applied to commercial

property. Business leaders, whose commercial property could be taxed at

more than four times the lowest residential homestead property rate,

wanted changes. In addition, one group sought to cap statewide property

tax rates for operations levies. State law did not limit tax rates for optional

levies.

To deal with these concerns, legislators made several changes. Initially,

these changes included the following: They voted to terminate all

operations levy authority by July 1, 1997, forcing districts to go back to the

voters for any renewal. In addition, they limited all operations levies to

5-year terms. Specifically to respond to business concerns about tax

fairness, the legislature began to phase in a market value-based property

tax system for optional operations levies. After 1997, commercial property

was to no longer be taxed at a higher rate than homestead and other

property. Finally, the legislature capped the amount of optional operations

levy revenue that a district could raise. In effect, this limited districts’

44According to state law, this amount is 10 percent of the basic revenue allowance, or $305 of $3,050 in

1992. In 1994, the allowance increased to $3,150 and the maximum guarantee increased to $315.

Page 51 GAO/HEHS-96-39 States’ Equity Experiences
Appendix V 

Minnesota Case Study

property tax rates for optional operations levies, which had not previously

been limited by state law. Initially, the revenue limit was set at 35 percent

of the basic revenue allowance but was further reduced to 25 percent in

1993.

Legislation Protects

District Revenues

Members of the legislative committee addressing education finance issues

said some high-spending districts were concerned that revisions to the

finance system might reduce their revenue, create fiscal hardship, and

harm the quality of their education programs. These districts sought

revenue protections and were supported by their legislators.

For example, most districts’ optional operations levy revenue was below

the statutory limit, though a few districts exceeded the limit, legislative

officials said. Districts located in sparsely populated areas were not

subject to revenue limits. In addition, suburban metropolitan districts

experiencing declining enrollment were allowed to retain their excess

revenue. Additional protective measures that the legislature passed were

to postpone the statutory expiration date for optional operations levies

from 1997 to 2000, and to extend the 5-year term limit on newly passed

levies to 10 years. Districts have options to extend these levies further if

they convert their levies to a market-value base.

The legislature also continued a state revenue program specifically

challenged as unfair by plaintiff districts in their equity suit against the

state. This program guarantees districts revenue that might otherwise have

been reduced due to changes in the school finance system. One legislative

fiscal analyst said that it is unlikely this program will be eliminated,

although funding is being reduced, because a handful of districts greatly

depend on these dollars.

Finance Reforms

Improve Equity, but

Other Problems

Emerge

Legislative and education officials and education advocates generally

agreed that equalizing optional property tax levies had made the finance

system fairer. However, education leaders in particular said that several

additional problems have emerged since the revisions and these problems

remain unresolved.

Revenue Equity Improves Legislative and education officials and education advocates generally

agreed that the new equalizing levy aid program has moved the state closer

to a finance system in which equal tax effort generates equal revenue per

Page 52 GAO/HEHS-96-39 States’ Equity Experiences
Appendix V 

Minnesota Case Study

pupil unit among districts. For example, we found that the differences in

relative tax burden between the state’s highest property wealth and lowest

property wealth districts has diminished since the 52 school districts filed

suit in 1988. According to a document prepared by plaintiff districts, the

tax rate for the poorest districts was on average almost one-fourth higher

than that for the wealthiest districts.45 By 1992 and 1993, however, we

determined, on the basis of State Department of Education data, that this

disparity had diminished to just over 6 percent.

Furthermore, we also determined that in 1988 a less wealthy district falling

at the 10th percentile generated expenditures of $59.57 per pupil for every

percent of tax levied, compared with $84.98 per pupil for every percent of

tax levied in a wealthy district at the 90th percentile. By 1992 and 1993,

however, the per pupil expenditures for every percent of tax levied were

essentially equal in two districts falling at the 10th and near the 90th

percentiles in wealth. A less wealthy district generated $129.58 in

expenditures per pupil for every percent of tax levied compared with

$132.25 per pupil in a wealthy district.

Differences in spending, which the state supreme court found were largely

justified by differences in operating costs and pupil needs, have not

changed significantly since 1988. In 1992-93, the district at the 95th

percentile in per pupil operating expenditures was spending 54 percent

more than the district of the 5th percentile. The disparity surpassed that in

1988, when the difference was 48 percent per pupil. The legislature has

required, however, that if the spending gap between the districts at the 5th

and 95th percentiles in general education revenue begins to increase

significantly, the state Department of Education will devise a plan to

reduce that growth and recommend that plan to the legislature.

Antitax Sentiment and

Increasing Education

Costs Create Additional

Problems

State education leaders pointed out two problems that have emerged since

equalizing legislation was introduced for optional levies. These problems,

which concern public support for taxes and growing education costs, may

affect state efforts to achieve improved finance equity. First, voter

resistance to taxes is growing. As a result, fewer districts can pass optional

levies, officials said. For example, voters in one such district near St. Paul

twice rejected the renewal of an existing optional operations levy in 1994.

The loss of about $350 per pupil unit caused the district to lay off about 70

teachers in 1995, the superintendent said. Voter discontent with taxes

45The Association of Stable or Growing School Districts, Factual Issues Addressed and Answered by

Court Decision in Funding Equity Lawsuit, Minneapolis, undated.

Page 53 GAO/HEHS-96-39 States’ Equity Experiences
Appendix V 

Minnesota Case Study

overall and the property tax in particular affected the outcome of the

referendum, he said. According to one state finance official, no real

growth has occurred in the proportion of districts statewide passing

operations levies. This has occurred while the state has increased

equalizing aid for districts passing levies. The ability of some districts to

pass levies, when other districts cannot, will affect spending disparities in

the state, education advocates said.

The second emerging problem is that the number of special needs students

requiring costly special education programs is creating fiscal pressures

statewide, state officials and education advocates said. While state

appropriations for the basic revenue allowance have increased only

10 percent between 1991 and 1995, aid for remedial education, special

education, and limited English proficiency are up 75 percent, 103 percent,

and 37 percent, respectively. Several people we interviewed said that,

although the state has increased aid for special needs children, aid has not

kept up with the costs of educating them.

The director of the organization representing the 52 school districts that

brought the 1988 suit said that some districts have been hit harder by this

growing population than others. For example, we determined that the

Osseo School District in school year 1987-88 was spending $277 per pupil

on special education services, but by 1992-93, its special education

spending had almost tripled to $766 per pupil. Another district struggling

with increasing costs has been the Minneapolis School District, where a

large proportion of the children enrolled are from economically

disadvantaged backgrounds and are of ethnic minorities. During our visit,

this district was considering another lawsuit against the state. Even

though the district has among the highest tax bases in the state and spends

more per pupil than 95 percent of the state’s districts, it is not enough, a

policy official with the district said. Academic achievement by minority

students has been below national averages.

Education advocates pointed out that state aid to districts reflects the

amount of money the state has available to fund education, rather than the

cost of providing it. Although the legislature established a commission in

1993 called the Coalition for Education Reform and Accountability to both

define and estimate the cost of ensuring a “basic education,” the

legislature has not acted on the coalition’s assessment and

recommendations. The legislature did not renew the coalition’s funding in

1995. Legislative and education officials said the coalition defined “basic

education” very broadly and indicated that a significant increase in

Page 54 GAO/HEHS-96-39 States’ Equity Experiences
Appendix V 

Minnesota Case Study

education spending by the state would be required. Given existing

budgetary constraints, it is unlikely that the coalition’s recommendations

will be implemented, state finance officials said.

Page 55 GAO/HEHS-96-39 States’ Equity Experiences
Appendix VI 

GAO Contacts and Acknowledgments

GAO Contacts Eleanor L. Johnson, Assistant Director, (202) 512-7209

Barbara Billinghurst, Evaluator-in-Charge, (206) 287-4867

Staff

Acknowledgments

D. Catherine Baltzell, Supervisory Methodologist, provided valuable

technical advice on study design; Nancy Purvine, Evaluator, led the case

study of Texas and coauthored the report; Virginia Vanderlinde, Evaluator,

led the case study of Minnesota and coauthored the report; Mary Reich,

Attorney-Adviser, and Dayna Shah, Assistant General Counsel, provided

legal advice; and Stanley H. Stenersen, Reports Analyst, facilitated the

organization and writing.

(104814) Page 56 GAO/HEHS-96-39 States’ Equity Experiences
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. Orders for 100 or more copies to be mailed to a

single address are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100