Why Local Education Funding Favors Politics Over Parents—And How To Fix It

Policy Brief

Why Local Education Funding Favors Politics Over Parents—And How To Fix It

Why policymakers should eliminate local operating revenues and move to a full-state funding model.

Executive Summary

The road to robust educational choice is paved with student-level funding equity. Virtually all school finance formulas are embedded with provisions that distribute resources inequitably, but few realize how these inefficiencies obstruct the kind of choice policies that empower parents. A primary source of this problem is local education revenues, which divide communities and restrict families from seeking better opportunities. Local revenues account for about 45 percent of all U.S. education dollars, with this picture varying widely at the state level. Since the early 20th century states have employed school finance formulas that help equalize funding for districts, but these mechanisms aren’t designed to achieve student-level equity, which means that similar students are often provided with different levels of resources, and funding portability is diminished. As such, local revenues make it difficult to seamlessly fund choice policies such as charter schools and education savings accounts, but their relationship with inter-district enrollment deserves special attention since these revenues play a central role in keeping public school doors closed to students.

Inter-district enrollment provides families with an expanded supply of choice opportunities. Research indicates that a district’s student achievement is a strong predictor of transfer demand and that students cross district boundaries for a variety of reasons, including to seek out specialized curricula such as engineering, performing arts, and college preparatory programs, and also to give those who struggle socially or are bullied a fresh start. But the reality is that districts don’t set enrollment policies based on the ideal of accepting “all comers.” Rather, they evaluate numerous factors and weight them against each other, with the marginal costs often outweighing the marginal benefits of accepting outsiders. Two factors in particular can influence a district’s decision to restrict transfer seats.

First, there is the “political wall” as district officials consider the political costs of transfer students. Many superintendents are afraid of creating tension with their peers, who are used to having geographic monopolies over students and their funding allotments. But research finds that the largest political costs come from within district boundaries due to demographics. Superintendents are under political pressure to refuse transfer students, especially if their district’s student achievement or household socio-economic characteristics are substantially greater than that of its neighboring districts.

Second, there is the “financial wall” as districts often have little financial incentive to accept transfer students. In general, state aid follows the child to the receiving district and local funds stay with the home district. While these additional dollars usually exceed the marginal financial cost of serving a new student, it is often far less than the district’s average per-pupil spending. And because of the way that local property wealth can interact with state formulas, some districts might receive no additional funding for transfer students.

In practice, the political and financial walls that divide districts converge to form a unified barrier with local dollars being the common thread, as they inflame political hostilities against open enrollment policies and provide weak financial incentives for many districts to make open seats available to transfer students.

Indiana is a model for school finance reform that highlights the link between funding equity and robust choice. In 2007, taxpayers revolted after property tax bills increased by an average of 20 percent–to-30 percent statewide. In response to public outcry, legislators passed HEA 1001 in 2008 to abolish property tax levies as a source of general fund education revenue. As a result of these changes, local revenue would still support debt service, transportation, bus replacement and capital projects, but raising dollars in excess of the tax caps now requires a voter referendum. What virtually nobody saw coming was that by eliminating local operating revenues and improving funding equity, legislators had effectively torn down a major barrier that prevented kids from enrolling in schools outside their home districts; the number of transfer students skyrocketed from less than 3,000 before the change to over 52,000 students today. Academically, the Hoosier State’s approach to education is paying off and it’s clear that the state’s bold steps did not have the negative effects that some feared, and that public education can indeed thrive without local operating revenues.

The most prominent arguments against adopting a full-state funding model are both overstated and outweighed by the benefits of adopting a formula that supports robust choice. In particular, the form of “local control” that local revenues provide can be more aptly described as a mix of political and bureaucratic control in which the demands of individual parents have little influence over a district’s decision-makers. In the 21st century, local control should mean providing educators with autonomy in the classroom and giving parents meaningful options to hold them accountable for outcomes. This system requires portable funding where money follows a child to their school of choice and three key reforms will help policymakers achieve this. These policies alone won’t solve every challenge related to inter-district enrollment, but by promoting funding efficiency, transparency, and positive financial incentives, they’ll form a solid foundation for an education system that puts students first and minimizes the role of political decisionmaking.

  1. Increase Transparency by Revamping Reporting Requirements
    States should at the very least increase transparency in their reporting requirements, since many lack even rudimentary data that should be publicly available. At a minimum, states should publicly report data around things such as capacity, transfer requests, transfer enrollment, and out-of-district transfer tuition.
  2. Adopt a Full-State Funding Model
    States should move away from local education revenue for operational expenses and adopt a full-state funding model in which dollars are allocated based on a “weighted-student formula” where funding is based on the needs of students. This approach to school finance promotes choice, fairness, and accountability, while helping to break up districts’ geographic monopolies. Short of this, policymakers should seek to deliver local education dollars “as if” they originated from state coffers in a manner that is conceptually identical to a full-state funding model.
  3.  Implement a State-Wide Open Enrollment Policy
    Policymakers should look to Florida’s Controlled Open Enrollment policy as a model for reform that helps ensure that public schools are truly “public.” Implemented in the 2017– 2018 school year, this program allows a child to enroll in any school or charter in the state that hasn’t reached capacity.

This policy brief will:

  • Explore the relationship between local education revenues and funding equity.
  • Illustrate how local revenues serve as a barrier to choice by erecting political and financial walls between communities.
  • Provide Indiana as a case study for reform that illustrates the relationship between funding equity and choice.
  • Address the two most prominent arguments against adopting a full-state funding model such as Indiana’s.
  • Make recommendations for reform.

Full Brief: How Local Education Funding Favors Politics Over Parents — And How to Fix It

Aaron Garth Smith is an education policy analyst at Reason Foundation, a nonprofit think tank advancing free minds and free markets.