America’s elementary and secondary schools are funded primarily by state and local revenue sources. State revenues derive primarily from general sales, personal income, and corporate taxes. Localities raise revenues primarily through property taxes and, to a lesser extent, local sales and income taxes. Federal aid to education has historically been provided to supplement state and local funds for students with the greatest needs. State school finance programs are meant to meet the educational needs of children, while considering budget priorities in each state. Finance programs vary in complexity as well as in the amount spent per pupil. Some of this variation in per pupil expenditures is accounted for by differences in the cost of educational services, the property wealth of the state, the amount the state is willing to spend for education, or the funding formula used by the state. In some states, this variation has led to lawsuits challenging funding formulas. From 1979-80 to 1992-93, total real expenditures for public elementary and secondary education increased by 40 percent to $254.4 billion. Total expenditures have generally increased since the 1960s, except for a slight decline between 1977 and 1980. Between 1989-90 and 1992-93, expenditures increased by 6 percent, similar to the rate of increase in public school enrollment during this time. This increase in total expenditures contrasts with the levels in the 1970s, when the totals remained somewhat level until increasing to approximately $189 billion in 1977-78 (see fig. 1). Since 1990, enrollment has begun growing after generally leveling off in the 1980s. In 1980-81, public school enrollment was 40.9 million; it declined to a low of 39.2 million in 1984-85. Thereafter, public school enrollment began growing slowly and in 1989-90 reached 40.5 million. From 1989-90 to 1992-93, public school enrollment increased by 6 percent, to 42.8 million. By the school year 2000-01, this enrollment is projected to increase to 48.3 million (see fig. 1). In addition, the number of at-risk children in all categories has increased since 1980. Between 1980 and 1990, the number of poor school-age children increased by about 6 percent to 7.6 million, while the overall school-age population declined. The numbers of other types of at-risk students, such as those with limited English proficiency (LEP), immigrants, and students needing special education, have all increased at similar or higher rates (see app. II, table II.2). We also examined data on all children under age 18, school age and nonschool age, because they provide a more comprehensive measure of the number of children expected to enroll in school currently and in the future. From 1980 to 1993, the number of poor children under age 18 in families increased by 35 percent, from 11.1 million to 15 million (see app. II, fig. II.4). The growth in these at-risk populations has increased the demand for specialized classroom services. Regular classroom services increasingly include special education for the physically and mentally challenged, compensatory education for the economically disadvantaged, and language services for LEP students. In addition, many schools will have to address the needs of other at-risk students, such as children who change schools frequently and are, therefore, more likely to be low achievers and have other difficulties such as health and nutrition problems. Because of the additional services associated with educating poor and other at-risk students, many schools face elevated cost requirements and must find ways to stretch current funding levels to pay for these services. This is more difficult in areas with high concentrations of poverty because such areas are frequently limited in their ability to raise revenues. This limitation is partially offset, in many states, by federal and state categorical education programs. After decades of increase (with one plateau in the late 1970s), per pupil expenditures for elementary and secondary education leveled off beginning in 1989-90, increasing less than 1 percent, on average, each year until 1992-93 (see app. III, fig. III.1). This leveling off of per pupil expenditures is due, in part, to the increased number of children who enrolled in our nation’s schools since 1990 and the effects of the 1990-91 recession. Before the 1990s, education spending—measured as current per pupil expenditures—rose steadily. Data going back to the 1960s show a rapid increase in expenditures—up 69 percent for the decade, with a slower rate of increase in the 1970s—35 percent—and a similar increase in the 1980s—33 percent. For the nation, the average total per pupil expenditure for 1992-93, using fall enrollment as a measure, was $5,296, although per pupil expenditures vary throughout the United States. In 1992-93, per pupil expenditures for the states ranged from $3,700 to $10,100 (see app. III, table III.2). From 1981-82 to 1992-93, on average, most states’ per pupil expenditure increased between 25 and 50 percent (see app. III, fig. III.2). Per pupil expenditures may vary substantially within a state. For example, in Texas, some school districts spent more than twice as much on total operating expenditures per pupil than others. While districts at the low end, the 5th percentile, spent $3,650 per pupil, high-spending districts, at the 95th percentile, spent $7,928 per pupil in 1993-94. These differences may exist, in part, however, because of geographic cost-of-living differences and differences in pupil needs. The previously increasing state share of education spending leveled off beginning in 1989-90 (see fig. 2). Since the early 1970s, the states had provided an increasingly larger share of education spending. In 1969-70, the state share was 39.9 percent, and it increased by 17 percent to 46.8 percent in 1979-80. In 1986-87, the state share had peaked at 49.7 percent. By 1990, the state share had decreased to 47.3 percent. In 1992-93, the state and local shares were roughly equal, with localities contributing a slightly larger share (47.4 percent or $118 billion) than states (45.6 percent or $113 billion). Some states’ shares declined further. Although localities had historically been the major contributors for education revenues, states began playing a larger role in funding education in the 1970s and 1980s. During this time, states sought to reduce the fiscal disparities among districts and became more involved in education reform efforts. Localities’ share decreased by 17 percent from 52.1 percent in 1969-70 to 43.4 percent in 1979-80. During the 1980s, the localities’ share leveled off. It rose slightly from 1988-89 to 1992-93—from 46 to 47.4 percent. During the 1970s, the federal share also began to rise, largely as a result of the increased number of programs for at-risk children. In 1969-70, the federal share was 8 percent, increasing to 9.8 percent in 1979-80. Thereafter, during the 1980s, the federal share decreased and reached a low of 6.1 percent in 1989-90. In 1992-93, the federal share increased to 6.9 percent or $17 billion. State, local, and federal shares for education spending vary by state. In 1991-92, state contributions ranged from a high of 73.8 percent in New Mexico to a low of 8.5 percent in New Hampshire, where citizens regard education as a local responsibility. Most states contribute between 30 and 70 percent. Local contributions range from 14 to 88 percent, and the federal contributions per state range from 3 to 17 percent (see app. IV, table IV.2). Between fiscal years 1987 and 1994, the relative share of elementary and secondary education spending in state budgets decreased by 11 percent. In fiscal year 1987, education accounted for 22.8 percent of total state spending but decreased to 20.3 percent by fiscal year 1994 (see app. V, fig. V.1). This decrease in the percent of states’ budgets spent for education occurred, in part, because of increased spending for Medicaid and corrections (see fig. 3). State shares for education and other government services declined because of relatively weak economic growth as well as the budget effects of state and federal mandates. State education needs compete for funds with other state services, and relative budget shares have shifted since fiscal year 1987. Between fiscal years 1987 and 1994, Medicaid’s share of states’ budgets increased sharply by 90 percent, from 10.2 to 19.4 percent. In addition, corrections’ share increased by 10 percent, from 3 to 3.3 percent. Meanwhile, elementary and secondary education’s and higher education’s shares decreased by 11 percent and 15 percent, respectively. In fiscal year 1990, Medicaid surpassed higher education as the second largest state program; in fiscal year 1994, Medicaid was nearly equal to elementary’s and secondary’s share of 20.3 percent (see fig. V.1). Medicaid spending, which provides medical care for the poor and is mandated by the federal government and administered by states, has been absorbing the bulk of additional revenue generated in many states. Twenty-four states experienced double-digit growth in total Medicaid spending between fiscal years 1993 and 1994. Increased corrections spending is due, in part, to court orders imposed on states requiring the relief of overcrowded prisons or improved prison conditions as well as to an increased number of prisoners. We developed a measure of a state’s ability to raise taxes and revenue based on taxable resources, accounting for differences among states in purchasing power and population (see app. I). In 1992, states with high ability to raise revenue were usually resource rich, had populations with high incomes and high property values, or had large tourist industries. The seven states that have very high ability to raise revenue overall—that is, 115 percent or more of the U.S. average—are Alaska, Connecticut, Delaware, Hawaii, Massachusetts, New Jersey, and New York. Those with very low ability to raise revenue overall—that is, below 85 percent of the U.S. average—are Alabama, Arizona, Arkansas, Idaho, Kentucky, Mississippi, Montana, New Mexico, Oklahoma, South Carolina, Utah, and West Virginia. (See app. VI and figs. VI.1 and VI.2.) We also examined each state’s ability to raise revenue for kindergarten to twelfth grade education using a cost-adjusted measure of total taxable resources per child enrolled in public schools. Six of the seven states with very high ability to raise revenue overall also had very high ability to raise revenue for education (115 percent or more of the U.S. average): Connecticut, Delaware, Hawaii, Massachusetts, New Jersey, and New York. Eight states had very low ability to raise revenue for education (less than 85 percent of the U.S. average): Arizona, Arkansas, Idaho, Mississippi, Montana, New Mexico, Utah, and West Virginia. (See app. VI, fig. VI.2 and table VI.1.) These 8 states are among the 12 with very low ability to raise revenue overall. States, however, vary in their willingness to raise revenue, which we measured as actual state revenue relative to the state’s ability to raise revenue. Some states tax heavily because their citizens have a strong preference for public services; other states tax lightly, reflecting a preference for a smaller public sector. States with very high willingness to raise revenue for education include Alaska, Maine, Michigan, Montana, New Jersey, Oregon, Vermont, West Virginia, Wisconsin, and Wyoming. States with very low willingness to raise revenue, according to our measure, for education include Alabama, Delaware, Hawaii, Nevada, and Tennessee. (See app. VI, figs. VI.3 and VI.4.) Recent trends in U.S. education finance reveal the leveling off of per pupil spending for education combined with increasing enrollment in public elementary and secondary schools. Meanwhile, the schools face an increasing number of at-risk children whose education costs may be generally greater than average. Moreover, education’s share of state budgets has declined, and federal education funding faces tight fiscal constraints. If these trends continue, America may be less able to adequately provide educational services for many of our school-age children or make necessary improvements in the educational system. Officials from the Department of Education’s National Center for Education Statistics and education finance experts reviewed a draft of this report and provided us with technical comments, which we incorporated 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 VII. To determine the national and state trends in education spending, we analyzed fiscal data from the Department of Education’s National Center for Education Statistics (NCES). In addition, we reviewed data from the National Association of State Budget Officers and other published works by education finance experts. We used the most recent actual and estimated NCES data; therefore, the time spans of the data in our figures and tables vary. When reporting state trend data, we provided information on all 50 states; we did not include the District of Columbia. When reporting finance data for a number of years, we provided data in constant dollars for greater comparability. In cases when NCES data were not in constant dollars, we used the price index developed by the Department of Commerce’s Bureau of Economic Analysis for state and local government purchases of goods and services to make adjustments. When comparing per pupil expenditure data at the state and national level, we used fall enrollments as the pupil measure. When we compared federal, state, and local shares of education revenues, we combined the local share with intermediate and private funds. Intermediate and private funds included a relatively small amount from nongovernmental sources, such as gifts and tuition from patrons. We have developed two measures of ability to raise revenue. One, which we call ability to raise revenue overall, measures the ability of states to finance public services, accounting for the costs of the services as well as a rudimentary measure of need for services—total population. The Advisory Commission on Intergovernmental Relations (ACIR) defines ability to raise revenue similarly, “as the hypothetical ability of a state and its local governments to raise revenue to provide public services in the state relative to the need for those services.” We have also developed a measure of ability to raise revenue that estimates a state’s ability to finance educational services, which we call ability to raise revenue for education. This measure accounts for the number of school-age children and the costs of providing educational services in the state as measured by average teacher salaries. Both measures of ability to raise revenue that we have developed use total taxable resources (TTR) as a component that assesses a state’s ability to finance services. TTR, defined and compiled by the Department of the Treasury, is the average of per capita personal income (PCPI) produced in a state and per capita gross state product (GSP). As noted in an earlier report, “GSP measures all income produced within a state, whether received by residents, nonresidents, or retained by business corporations.” TTR is a more comprehensive indicator of taxable resources than PCPI alone, in part, because it also considers income produced in a state but received by nonresidents. The Congress has included TTR in the allocation formula for the Alcohol, Drug Abuse, and Mental Health Block Grant. We have also developed two measures of willingness to raise revenue: an overall measure and one for education. Willingness to raise revenue overall can be determined by comparing a state’s actual revenue with its capacity to raise revenue. Willingness to raise revenue for education is determined similarly but focuses on spending for kindergarten to twelfth grade public education alone rather than all public services. For each of our “willingness measures,” as well as our two “ability measures,” we have developed an index by comparing the state figure to that of the whole nation. The following describes each of these indexes. Our index of ability to raise revenue overall has two components. The first component is TTR per capita for a state divided by TTR per capita for the nation. This provides an index of nominal ability to raise revenue. Our second component, a cost index or purchasing power adjustment, provides a common measurement for states with greatly varying costs. This cost index is based on the work of Department of the Treasury analysts. Robert Rafuse developed a state level labor-input-cost index for 1986 based on the mean annual earnings of males 45 to 54 years old who worked 40 or more weeks per year, accounting for seven different levels of education. This work was later replicated by Kiran Duwadi for 1990.Dividing the first component, an index of nominal ability to raise revenue by the cost index results in a cost-adjusted measure of ability to raise revenue overall. Our index for ability to raise revenue for education parallels that for ability to raise revenue overall. Again, the index has two components. The first is TTR per school-age child in the state divided by that for the nation. The second component is a cost index based on average teacher salaries for each state, adjusted for average levels of teacher experience for each state. Using a methodology developed by F. Howard Nelson along with information on teacher experience from the Department of Education’s 1990-91 Schools and Staffing Survey, we found that teacher salaries increase about 2.33 percent, on average for the nation, for each year of teacher experience. We then adjusted average teacher salaries for each state, a measure of the costs of providing educational services in each state, to account for differences among states in average levels of teacher experience. For example, we found that the average teacher salary in Oklahoma for 1991-92 was $26,514 and that the average number of years of teaching experience was 12.9, about 2.2 years below the national average of 15.1 years. If Oklahoma were to be able to attract teachers with comparable years of experience as the nation as a whole, it would cost the state, we estimate, an additional $618 for each year of teaching experience or about $1,359 for 2.2 years. Therefore, we estimate that the experience-adjusted average teacher salary for Oklahoma would be about $27,873, still well below the average for the nation, $34,213. Consequently, while our measure of the cost of educational services in Oklahoma is still low, it does account for Oklahoma’s costs being somewhat higher were it to have levels of teaching experience comparable to the U.S. average. To illustrate how the index of ability to raise revenue for education was developed, consider again the example of Oklahoma. Oklahoma has a relatively low TTR per school-age child, about 73 percent of the U.S. average, or $104,693 per child compared with $143,178 per child for the United States. This stems from two factors: (1) relatively low TTR and (2) relatively high proportions of school-age children. While Oklahoma’s nominal ability to raise revenue for education is low, its cost of providing educational services, that is, adjusted average teacher salaries, is also low, at about 81 percent of the U.S. average. When we applied a cost adjustment to reflect the purchasing power in each state, we calculated an index of .86, which reflects Oklahoma’s ability to raise revenue for education—less than the average for the nation as a whole of 1.00. Our index of willingness to raise revenue overall is based on a state’s total state and local revenue divided by the state’s TTR. This number is divided by total state and local revenue in the nation (or all states), divided by the nation’s TTR, to provide an index. For example, if the index is 1.10, then we know that the state’s willingness to raise revenue overall is 10 percent greater than that for the whole nation. Conversely, if the state’s index of willingness to raise revenue is .90, then the state’s willingness to raise revenue overall is only 90 percent of that for the whole nation. Similarly, our index of willingness to raise revenue for education is based on actual state and local revenue for kindergarten to twelfth grade public education divided by the state’s TTR. As an example, the index of willingness to raise revenue for education for Wyoming was 1.31 for 1991-92, substantially over the 1.00 index for the nation. Adjusting the two measures of willingness to raise revenue for differences in purchasing power by state is not necessary because such measures would be in both the numerator and denominator and therefore would cancel each other out. We also examined changes in the levels of ability to raise revenue and willingness to raise revenue over time—from 1981-82 to 1991-92. For this analysis we determined the measures as described above, except that we did not put the measures in index form—that is, relative to the U.S. average. When we examined the change for the nation as a whole, we determined that ability to raise revenue for education, a measure of the nation’s revenue base per child, was $143,178 in 1991-92. The nation’s ability to raise revenue for education in 1981-82 in unadjusted and therefore noncomparable 1981-82 dollars was $77,412. To provide comparability, we adjusted each total used in the two measures of ability to raise revenue, for education and overall, so that they would each be in 1987 dollars, using a deflator developed by the Department of Commerce’s Bureau of Economic Analysis. This deflator was developed specifically for state and local government purchases of goods and services. After the figures were adjusted, we found that the nation’s ability to raise revenue for education had increased 26.6 percent from 1981-82 to 1991-92, from $94,752 to $119,915. We conducted similar analyses to determine changes over time in the measure of ability to raise revenue overall. We also determined changes over time in our two measures of willingness to raise revenue, for education and overall. This appendix provides additional data on the increase in public school levels as well as the number of at-risk students. Following are the tables and figures presented in this appendix in order of appearance. Figure II.1 shows public school enrollment levels from 1980 projected to the year 2000. Table II.1 presents the data points for figure II.1. Table II.2 shows the growth in specific at-risk populations of children (poor, special education, limited English proficient, and immigrant), 1980 to 1990. Figure II.2 shows changes in enrollment by state. Table II.3 presents the data points for figure II.2. Figure II.3 shows changes in numbers of children in poverty by state. Table II.4 presents the data points for figure II.3. Figure II.4 compares the percent change among all children under 18 and poor children under 18, 1980 to 1993. We chose the under-18 age group to provide a more comprehensive measure of the number of children who are, or will soon be, attending school. Table II.5 presents the data points for figure II.4. Total enrollment (thousands) School year 1980 (thousands) School year 1990 (thousands) Percent change in enrollment between 1980 and 1993 (continued) This appendix provides additional data about total expenditures. Following are the tables and figures presented in this appendix in order of appearance. Table III.1 presents the data points for figure 1. Table III.2 shows the total per pupil expenditures from the perspective of between-state comparisons. Figure III.1 shows national averages of current per pupil expenditures from 1963-64 to 1992-93. Table III.3 presents the data points for figure III.1 and shows the range of per pupil current expenditures, 1963-64 to 1992-93. Table III.4 shows the range in per pupil expenditures within each state for 1989-90, using school districts at the 5th and 95th percentiles. Figure III.2 shows the percentage increase in per pupil expenditures by state between 1981-82 and 1992-93. Table III.5 presents the data points for figure III.2. Total expenditures (dollars in billions) Per pupil expenditure range (in dollars) Low-spendingdistrict per pupil expenditure (dollars) High-spendingdistrict per pupil expenditure (dollars) (continued) Low-spendingdistrict per pupil expenditure (dollars) Figure III.2: Most States’ per Pupil Expenditure Increased by at Least 25 Percent Between 1981-82 and 1992-93 (in Constant 1992-93 Dollars) 1981-82 (in constant 1992-93 dollars) Percent change between 1981-82 and 1992-93 (continued) 1981-82 (in constant 1992-93 dollars) Percent change between 1981-82 and 1992-93 Based on an index for state and local government purchases of goods and services prepared by the Bureau of Economic Analysis, U.S. Department of Commerce. These data do not reflect differences in inflation rates from state to state. This appendix provides additional data on the federal, state, and local shares of education revenues. Following are the tables and figures presented in this appendix in order of appearance. Table IV.1 presents the data points for figure 2. Table IV.2 presents the federal, state, and local contributions by state, 1991-1992. Federal (percent) State (percent) Federal (percent) State (percent) Local(percent) (continued) Federal (percent) State (percent) This appendix provides additional data on changes in the apportionment of state budgets. Following are the tables and figures presented in this appendix in order of appearance. Figure V.1 compares the apportionment of state budget shares in 1987 and 1994. Table V.1 presents the data points for figures 3 and V.1. This appendix provides additional data on ability and willingness to raise revenue overall and for education. Following are the tables and figures presented in this appendix in order of appearance. Figure VI.1 shows ability to raise revenue overall in each state in 1992. Figure VI.2 shows ability to raise revenue for education in each state in 1992. Figure VI.3 shows willingness to raise revenue overall in 1992. Figure VI.4 shows states’ willingness to raise revenue for education in 1992. Table VI.1 gives the data points for figures VI.1, VI.2, VI.3, and VI.4. (See app. I for a description of how these indexes were derived.) Table VI.2 provides information on the change in states’ willingness and ability to raise revenue overall and for education between 1982 and 1992. Jerry Fastrup, Supervisory Economist, and Robert Dinkelmeyer, Senior Analyst, provided valuable technical advice regarding public finance issues. This report benefitted greatly from comments from the following education finance experts: William Fowler, Education Statistician, and Frank Johnson, Education Statistician, of the Department of Education’s National Center for Education Statistics; Wayne Riddle, Specialist in Education Finance, and Liane White, Technical Information Specialist, of the Congressional Research Service; and Martin Orland, Senior Fellow, and Carol Cohen, Senior Research Associate, of The Finance Project. 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Summary: Pursuant to a congressional request, GAO examined the current status and trends in public education spending, focusing on: (1) the current expenditure levels for education and how they have changed over time; (2) the roles local, state, and federal governments play in financing education in the United States, and how these roles have changed over time; and (3) how the states differ in their capacity to provide resources for education and their relative tax effort. GAO found that: (1) since 1980, total real expenditures in public elementary and secondary schools have increased, while the average national per pupil expenditure increased then stabilized after 1989; (2) total public expenditures for elementary and secondary education increased by 40 percent to $254.4 billion from the 1979-1980 school year to the 1992-1993 school year; (3) the number of poor children attending elementary and secondary schools has increased, and the cost of educating these and other at-risk children is higher than educating those not at risk; (4) the average per pupil expenditure for elementary and secondary students has leveled off after years of increase; (5) the average per pupil expenditure in school year 1992-1993 was $5,296; (6) the portion of state budgets designated for elementary and secondary education decreased between fiscal years 1987 and 1994; (7) states' ability to raise revenues for education grew more slowly than their willingness to raise revenues for overall spending; and (8) state and local governments feel more pressure to increase education spending in less wealthy school districts.