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. 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). 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. 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. 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. 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. 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. 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. 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. 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. 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. Nonetheless, the Minnesota State Legislature changed the system. 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 due to the unwillingness of less wealthy localities to tax themselves. 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. 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. 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. 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 already made further changes to equalize more of the state education revenue. (See table 2.) 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 provide substantially equal educational opportunities to all students, leaving it to the legislature to devise a remedy. 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). 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 educationand determined the local share of this cost on the basis of a locality’s fiscal capacity. To finance the estimated $665 million needed to fund this 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.