Ep. 152: A New Era for K–12 Education Funding

December 10, 2019

Our VP of External Relations Brian McGrath, Director of Fiscal Policy and Analysis Marty Lueken and EdChoice Fellow James Shuls discuss big takeaways from this year’s Walton Finance Symposium.

Brian McGrath: Hello, everybody. Welcome to another version of EdChoice Chats. This is Brian McGrath. I’m the Vice President of External Relations at EdChoice. I am joined today by two rock star researchers in the school choice movement and members of the EdChoice team. One Marty Lueken, our director of fiscal policy and analysis.

Marty Lueken: Hi.

Brian McGrath: Hello, Marty. Thanks for coming.

Marty Lueken: Thank you.

Brian McGrath: And another one phoning in from Missouri, James Schuls, assistant professor at the University of Missouri-St Louis. James, how are you?

James Schuls: I’m doing well. Phoning in, but not phoning it in.

Brian McGrath: Well, we’ll be the judge of that. James is also an EdChoice fellow, so he does a lot of work with our team and has for years. So, we’re glad to have both you guys on the show today. We’re going to talk about something a little bit different, and I’ll give a little background on this. So, we recently hosted an event, we being EdChoice, called The New Era for K–12 Education Funding. And this is an event that came about with a partnership with the Walton Family Foundation. And it’s a series of events we’re doing that are exploring the basic question of if we’re going to have a choice rich environment in say 10-15 years, what are some of the problems in education structures, like funding for example, that we need to address now so that when we get our choice programs in the next 10 or so years, we’re kind of ready to run and not doing a lot of back-filling on certain policy areas.

So, we hosted this event back in September and the way we do these event—this is our second one—is we try to bring a variety of people in. There are small groups. We had 18 participants in this one. We try to get a variety of experiences, a variety of geography represented, of gender represented, all different sort of points of view on some of these topics. And then we break folks into small groups and we actually have them work. So, this is not a conference where you get to go sit in the back of a big room and just listen to a panel of speakers. Now, those are great, because I know Marty Lueken does a lot of those and he’s a rock star as I said, but this is a little different. So you actually get in a small group, we kind of give you some problems to think through, and you hash them out.

And then we have a big simulation at end of it and we kind of see what people come up with. So, that’s what we did with this event and what I’m going to do today is ask Marty to describe a little bit about what is this the education funding problem that we’re actually trying to solve. I mean what’s wrong with education funding right now as it is that we need to be doing something different. And then I’m going to ask James, who actually participated in one of the small groups, to kind of talk about how that dynamic worked, what they talked about, and what kind of solutions either big or small they might’ve come up with. So, that’s what we’re going to do. So Marty, why don’t you tell us a little bit about what are we trying to look at in the education funding system as it currently stands that might give some folks a little background and as we continue this conversation.

Marty Lueken: Sure. Well, first of all, let me just say that school funding is a very, very sexy topic. Wouldn’t you both agree?

Brian McGrath: Oh, absolutely.

Marty Lueken: Educational choice is simply a way to fund a K–12 education system. Basically choice is a funding mechanism. So, I think it’s first helpful to look at how we fund public K–12 education systems currently. So, the school districts receive revenue from three resources: local revenue, which is usually through your local property tax, state revenue and federal revenue. And then districts subsequently will disperse these funds to their schools. Now, how the dollars flow not only varies greatly by state, so each state has its own funding formulas or funding systems, each of which is incredibly complex as you probably know. But how dollars flow can vary greatly by district as well. So, within states you can have a lot of variation in terms of how districts are funded.

Now without getting into the weeds, we have funding systems where dollars are not allocated entirely based on students or student need. It’s the case that most states allocate some portion of school funds in a student-centric way, either student enrollment or based on student need, but to what extent they do that will vary by state. School funding may also be based on other factors that are independent of enrollment, like population demographics, which is how a lot of the federal dollars are allocated, perceived staffing needs, program costs and so on. In many cases, some portion of funds are allocated based on students and while some other portion is based on factors other than students. Now this arrangement is just one of the big school funding issues. I think there are a lot of issues, but this in particular has implications I think for how effective a school choice program will be for students participating in them.

With virtually every choice program, especially with private choice programs, the level of funding that students participating in these programs receive is significantly lower than the level of funding they would have generated had they enrolled in a district school. In most cases, these gaps are significant. For example, students participating in the voucher program here in Indiana receive on average about one third of the per-pupil school funding. For many individuals, like education reformers, policymakers, parents and others, one of the goals for having these educational choice programs in the first place is to promote educational opportunity and to incentivize the expansion of educational options for all students so that families have better chance of finding something that matches their needs, right?

If these are your goals, the success is going to be quite limited given how educational programs are incorporated in the K-12 finance systems and given how school funding is currently set up. And that’s because you have choice programs which are inherently student-centric and family-centric operating in funding systems that are not completely a student-centric or family-centric. So it seems that the two systems, if you will, are at odds. So, that’s I think why this is an important issue for choice.

Brian McGrath: And you said education funding wasn’t sexy. I mean, come on Marty.

Marty Lueken: I know, right? I make it sexy.

Brian McGrath: That was good. So, James, let me turn to you now. What I want to ask you about first is, one of the parts about this style of event that we’ve been doing here at EdChoice is that we try to bring together people who don’t really spend a lot of time together in the same events, right? So, it was a pretty diverse group from experiences and all that. Tell me a little bit about just the kind of general vibe of the gathering itself and how people interacted, because one of the things I noticed right off was that people just didn’t know each other, so they had to spend a little time getting to know each other. But just tell me about your initial impressions of the event when you first showed up that first night.

James Schuls: Yeah, I think that’s absolutely right. There are lots of people that I didn’t know. A lot of people that I knew of. I had seen their names or you know, I’d read some of their work or something along those lines, but I’d never interacted with them. And so it was really just a great experience to get together with a diverse group of individuals who are all interested in the same sort of nerdy topic. It’s rare that I gather with people and get to talk about school finance. They’re actually listening and they’re engaged and they have ideas that they want to share. Like I busted out a nerdy joke at one point that in almost every context would have been a flop, but in this audience it just killed. It was really a lot of fun for me to get together with this group of individuals. You had people working in sort of right-leaning think tanks. You had people left of center who are interested in choice for social justice reasons. I mean it was just an eclectic group of individuals, and it was a lot of fun.

Brian McGrath: Yeah, that’s great. Did you find that the… Sometimes you get two groups like that together and everybody comes in with their kind of staked out ground and they’re just trying to convince each other that they’re right. Did you find was it collaborative. Was it contentious at all? What was the interaction amongst the people in the small groups that you were in?

James Schuls: Yeah. Well, like you said, we did break up into three small groups and I can’t say what happened in all of the small groups. Mine was interesting because everyone had ideas but everyone listened. You gave us directions on what to do. And one of the things I found funny was how each of the three groups kind of took those directions a little bit differently.

Brian McGrath: Yes, exactly.

James Schuls: In my group we took it to say what ideally, like how would we structure school finance in a system that really supported school choice? Those were sort of our directions. And we had one individual in our group who I would describe as being sort of old-school conservative. And that mindset oftentimes really thinks about, and I kind of come from that background a little bit myself, where you think about local control of education. You’re wary of the federal government or state government coming in and taking over and telling the local community how to do things. But as we talked and we talked about the importance of having more equalization of funding, so you could move across district boundaries or you could have more free choice through different parts of the state. You could see this individual who hadn’t ever thought about the possibility of allowing greater centralization of school funding start coming around to this idea.

You know something, if you would’ve said, “Hey, the state’s going to come in and take over your funding,” he would’ve absolutely been opposed. But then as we talked and we worked things out, you could see him coming around to different points of view. And it was really interesting. I think I saw that several times throughout the course of the couple of days we were there.

Brian McGrath: Yeah. That’s one of the fun things about this is that one, it’s kind of a closed door meeting in a way, and we kind of follow the Chatham House approach where you can learn and share, but everybody’s kind of anonymous at the same time. And it was fun to see people interact in that way and maybe stretch their legs a little bit and think about an idea that would be not appropriate in their normal day jobs as it were. You guys were… Because of the way we did it was you were tasked in the afternoon of the second day to come up with some ideas, whether there would be tactics or strategies about an education funding system. And then we had everybody report out and we talked about it as a group. But were there any ideas either that came out in your group or that you heard amongst others that really stuck out to you as kind of novel or important or impactful in some way?

James Schuls: Well, I think that, and I don’t know if this is novel or important or impactful, but I find it interesting.

Brian McGrath: Yeah, that’s good enough.

James Schuls: Just the universal sort of agreement that people are coming to that in order to foster a really robust school choice, we’ve got to have more equity in funding. And it’s funny because oftentimes the opponents of school choice, I think like the lump school choice opponents and say they’re either attacking public education or they think that we want to defund public education or whatever. But what I found from most people, and maybe it wasn’t universal agreement, but was widespread agreement for more equity in funding and generally an agreement that maybe more funding wouldn’t be such a bad thing. But that just I thought was interesting how that idea that we need equity. It’s so hard to foster a school choice system when you have a district spending $18,000 per pupil bordering a district spending $10,000 per pupil. Students are not going to cross district lines if the dollars aren’t following them, if there’s this big inequity. And so there was really widespread agreement around that and I that I found really interesting

Brian McGrath: Mm-hmm.

Marty Lueken: And James, did you also find that folks definition of equity were pretty much aligned up with each other?

James Schuls: In our group we got into talking about what type of students should get additional funds. If students from disadvantaged backgrounds who are from low income families or have special needs or limited English proficiency. We talked about those types of things. And again, I think there was pretty universal agreement that students with special needs or that are what you might call harder to educate, should get extra funds. Like we might have some disagreement on what those weights should be or how much they should get. But really there was, and I’m not going to say an universal agreement on equity or anything like that, but again, generally the idea was people agreed that students have varying needs and there should be some base amount of a dollar amount for every child. But then students who have these special needs or are harder to educate, should have more funds.

And there are two reasons for that. And you and I articulated this and maybe this is why they agreed with us. You and I articulated this Marty in the paper we wrote. You got to get the weights right. In a school choice environment, if a student with special needs is coming in at the same dollar amount as a student with no special needs, the school has incentives, more incentives to take the student with no special needs. And we want to make sure the system… That every student is served. And we want to make sure that you don’t unduly burden schools so that if they have to meet a student special needs, but they’re not receiving the funds for it. And we oftentimes think in public education, I think I heard someone say this when we were at the meeting, it’ll all come out in the wash, right?

So, we don’t need to really put a large weight on that student with some sort of special needs who has an IEP because it’ll all come out in the wash or they get a lot of funding. But if when a school choice environment in a private school is taking some students and one or two students with special needs coming in that may not come out in the wash, right? They need to have the dollars attached to that child to serve that child’s needs. And so again, there was a pretty widespread agreement that we should have some sort of weighting system and we might have some disagreements about what the weights are. But I was pretty stinking optimistic that when I left the meeting there was such agreement amongst so many different people.

Brian McGrath: Yeah. Marty, you’ve done a lot of work on ed funding in general. What states are kind of doing it right or moving in the right direction? And James, you can weigh on this too, because I know you’ve got expertise in this area, but I know at the meeting there were several states that people kind of kept circling back to like, “Oh, they’re doing an interesting thing in this place and maybe we ought to look at that as a model.” But what did you guys, I’ll let both of you take a stab at it, but what states currently are doing some things that you all think makes sense?

Marty Lueken: Well I think California is kind of held up as a model at least in terms of states that have enacted school funding reforms in recent years. In 2013, I believe, they passed the school funding bill where essentially they moved more dollars to more of a student weight-based funding formula. But they also kind of lifted regulations and restrictions on how funds are used. So, the local school districts and public officials have more autonomy in how their resources are used.

Brian McGrath: James, you got any thoughts on that? What state maybe is doing some things right?

James Schuls: Well, I think that we saw some elements in lots of different places that people said this is a good idea, right? So, for instance, we know historically school districts have relied a lot on property taxes. And property taxes tend to be where we see the disparities come in among school districts. Property-rich school districts have a lot more resources than property-poor school districts. And so states that either have some sort of state collection of the property taxes or that do a good job of sort of rectifying the differences between the school districts, we saw that talked about several times as being a very good model.

And again, as I mentioned, the weights. States that are weighting students appropriately or are giving significant weights to students with varying categories of special needs, right? An example of the way not to do it would be Missouri. Missouri gives one weight to all special needs, but of course a student who has a mild reading disability v. a student with severe autism or some other forms of impairments, those are very different costs. And so getting a weight that is proportionate to the level of the disability is important. So, I would say there were elements from lots of different states that stood out.

Brian McGrath: One of the ideas that the groups reported out, somebody kind of suggested that if you really want to have some good stuff in a dozen years, we’d better get involved now and do small things. Like there are some little things that can be done to funding formulas now that would lay the groundwork for broad school choice in the future. I don’t know if you remember that part of the discussion or not, but do you guys have any suggestions on kind of small things advocates could try to push for now that might make broad based school choice more likely in a state in the future?

Marty Lueken: Well, I think one aspect is hold harmless and some states like Pennsylvania is an example, they have these rules where districts can receive some fixed level of funding regardless of their enrollment. So, if a district has declined in enrollment, well they can continue to receive the same level of funding from say like two, three years, four years, or even longer. Here in Indiana we used to have perpetual hold harmless, so it went on and on. And that can get expensive. But more importantly I think that also dampens the incentives for districts to be responsive to students and to families. It weakens the incentive to retain students and to serve them well. I think that’s one thing. Though, James, your former organization, the Show-Me Institute, recently released a report on ways that the state of Missouri could reform its own school funding formula. And you’ve done a lot of work on that.

James Schuls: Yeah.

Marty Lueken: And maybe you want to talk a little bit about that?

James Schuls: Yeah, absolutely. And it’s sort of in line with what you’re saying on the hold harmless. Part of the problem in a lot of formulas is they become much too static, right? They don’t adjust when students leave or especially when students leave. They oftentimes adjust upwards when students come in but they don’t adjust when students leave the school district. And so that hold harmless. Missouri has a hold harmless provision where no district can get less funding from the state than they were getting in 2005 no matter how few students they have. And I think it’s almost 40% of our school districts are now on the hold harmless formula. What’s the point of even having a new formula when you have so many on an old formula? So, hold harmless is certainly a good thing that every state should look at. How do we phase those provisions out?

In some states, Missouri being one, and I don’t know if there are others out there that do something like this, but they fix property taxes at a specific year. The way it works in a lot of places is that they’ll calculate how much the school district should get and they subtract out local effort. Local effort being what you raise on your local property taxes and some other funds as well. Then the state will pay the rest, right? They determine how much you should get. Take out local effort. They pay you the rest. Well, Missouri pegs property taxes at this 04, 05 level and they’re fixed there. And so even though property tax assessments have changed a lot in that time, in the past 15 years, we’re still calculating local effort at that level. And what that does when you have something like that is it helps lead to greater inequities because the districts that have rapidly growing property tax bases are wealthier districts. They tend to be wealthier districts and they’re reaping this double benefit where they’re getting increased local property revenue, but they’re still getting the same amount of state revenue because it can’t go down.

And so that’s the key piece we need to look at here in Missouri and in any state that does that, that fixes local effort or local taxes or property taxes. Those things should be changed. And I think the whole, you could sort of sum up all these things, but fixing of the local property taxes, the hold harmless. Even the districts that we talked about where they… Marty kind of mentioned this, where they don’t assign how much money a school district should get based on students, but it’s based on some sort of static measure of needs. When these formulas are static, when they’re fixed and they don’t allow for change over time, that’s not a very good system for choice to happen because in choice we expect students to be moving. If we have a static system and a student moves between three schools within three or four years, you might have three different schools all counting that student and we would be paying triple for the one student, right? So you need a system that’s much more dynamic, that adjusts, and can allow the dollars to follow the student where they’re going to school.

Brian McGrath: Makes perfect sense to me. What would you say James, and Marty you can take a stab at this too, like what was your kind of big takeaway from the event? Whether it’s a piece of information you learned or a relationship you made or just something, what would you say looking back, “Yeah, I’m glad I went because…”

James Schuls: Oh, well I’d say a variety of reasons. One is I’m glad I went because I got to interact with a lot of people interested in the same topic who I don’t normally interact with and so that was just the connections and meeting new people. That was a ton of fun. Secondly, I would say that this work is really tough. I mean, I knew that going in, but everyone acknowledges that changing school funding is incredibly difficult to do, but that’s why these types of things are important. This type of podcast is important because we got to keep the conversation going. We got to keep getting people educated and informed because to do this type of work, this is a comment you heard from everybody, there are only a handful of people in your state who know how the funding formula works, right? And Marty can confess, that’s so true.

Very few people have an idea of how these things work and it’s really tough to get anything changed. And the reason that we have all these negative things in the formulas that we’ve been talking about is because when they go through the negotiation process, everyone’s trying to get a slice of the pie, right? So, just educating people and having more people informed and aware, and getting at the table so they can make a difference and try to impact funding so that it can support more school choice I think is really important.

Marty Lueken: And to build on what you just said, because funding formulas are very opaque you have a lot of transparency issues. They are hard, but the conditions that are kind of necessary to be able to reform a school funding system happens rarely, maybe once every 15 or 20 years is what I often hear others say. So, if you’re a state where you have conditions in place that would enable you to pursue this type of reform, then I think my takeaway from talking to folks is that if the chance comes around, get it right, you know, go for a home run. So, I think that yeah, you just got to get it right if you’re going to do it.

James Schuls: Well, and I think we should say this, and maybe you said it earlier and I just want to reiterate, that we’ve been pushing for school choice for many years now and choice is often an add on. It’s most often tacked on. It’s an afterthought when it comes to funding, right? We pay for it through tax credits or it’s an outside line item or whatever it is. And really the reason we’re focused on this is we want to create a system where choice isn’t an afterthought, right? Where choice is a central component of it. And that’s all we’re saying. Get a seat at the table. Be prepared when those opportunities come up and be educated so that if you have a chance to advocate or if you have a chance to be a policymaker and be at the table, that you could help to put in some things within the system that don’t make choice an afterthought, but they really create a system that is designed to help facilitate school choice.

Marty Lueken: Well said.

Brian McGrath: Yeah, no, that’s exactly… You kind of brought it back full circle. That was the point of this gathering was to get people thinking about what to do now so that, like you said, it’s not an afterthought. It’s just built into the system and that way we’ll be in a better position as choice continues to evolve and spread across the country. Well Marty and James, thanks so much for being a part of this and for being a part of the meeting itself. Marty had a great big role in kind of putting that stuff together and James, you were actually a participant, so glad you guys could be a part of that. Hopefully this will spur some more conversation and maybe we’ll do this again next time to talk some more ed funding because as Marty alluded to earlier, it’s a hot topic on everybody’s mind. So anyway, guys, thanks so much.

Marty Lueken: Always a pleasure.

James Schuls: Thank you.

Brian McGrath: Thanks everybody for joining us today for another episode of EdChoice Chats. Be sure to subscribe to our podcast on platforms such as SoundCloud, iTunes, Stitcher, or wherever you can get your podcast. Also, be sure to subscribe to our email at edchoice.org for all the latest and greatest news about school choice.