Ep. 95: The Future of K–12 Funding with Marty Lueken and James Shuls

January 30, 2019

There is not a single state, yet, that has achieved an equitable, efficient and opportunity-focused K–12 funding system, according to the authors of our latest report.

In The Future of K–12 Funding, education finance Marty Lueken and James Shuls envisioned a new, practical way for policymakers to improve state K–12 education funding systems based on those three core values. As a part of the study, they examined three states’ funding formulas—in Indiana, Mississippi and Texas—to show how each state could (and should) make their funding systems student-based and choice-centered. They also conducted interviews with 13 public and private school officials directly in charge of finance to get a better understanding of what changes schools might face with such funding reforms.

Drew Catt: Hi, I’m Drew Catt, EdChoice’s Director of State Research and Special Projects. I’m back today for another EdChoice Chat, speaking with Doctors James Shuls and Marty Lueken. James is an assistant professor at the University of Missouri St. Louis, or UMSL, and an EdChoice fellow. Marty is EdChoice’s director of fiscal policy and analysis. James and Marty are co-authors of our newest report, [The Future of K-12 Funding]. Thanks for joining us today, gentlemen.

Marty Lueken: Good to be here.

James Shuls: Yeah, it’s great to be with you.

Drew Catt: All right, well let’s jump right in. Marty, would you start us off by telling us about this report and what inspired it?

Marty Lueken: Sure. Well, school choice, however one may view it, is expanding here in the U.S. In 2006, of all kids enrolled in public and private schools, there are about 2 percent of students who were either in public charter schools or who were participating in private school choice programs. Today, that share is about 6 percent, so it’s growing. It’s likely that choice will continue to expand rather than go away in the years down the road.

With that in mind, we wanted to take a long-view approach with this paper and try to answer the question for states who want to foster a broad educational choice ecosystem, a public education system of universal choice, how should they fund that system? Are there ways that they can better organize their school funding formulas or their funding systems to help foster or create a system of universal choice?

As James has written about in the past, here we take public education to mean what Milton Friedman described, the Nobel Laureate economist. Rather than a system of public schools, public education, rather, refers to the idea that all families should have access to an education that best fits their needs at taxpayer expense.

Let me first say that reforming school funding formulas is a really hard thing to do, and so we’re not suggesting that states should change how they fund schools first before they introduce or expand choice programs. But if states are going to go down the road of funding reform, for whatever the reason might be, then they should consider reforming their funding systems in a way that can foster broad educational choice for families in their states and, of course, they should do it in a way that meets their constitutional duties.

People often think about school funding as an accounting issue, but education finance is really shaped by our values. In examining how states can reorganize their funding systems, we look through the lens of what people value in their education systems. We think that a system of universal Education Savings Accounts, or ESAs, is the ideal funding mechanism for enabling a system of public education envisioned by Friedman.

Drew Catt: Awesome. That’s very interesting, Marty. I want to kind of put my finger on something that you said there towards the end about values and the importance of values. James, I’m going to turn it to you and ask what values are in play with funding education?

James Shuls: Yeah. I think Marty, what he said there, he touched on the sort of overarching premise here. The overarching premise, like the point that should be taken home by people, is that we need to shift away from funding school systems to funding a system of education that supports students. When we think about the values, there are three that we outline in the paper. We’re not the first to talk about these values, but we’re rephrasing them a little bit to really drive home this point that public education should be about educating students, that students are the heart of the matter.

The three things that we outline are equity, efficiency and opportunity. Equity is, there are lots of different ways you could define it, lots of different ways you could measure it. One way that people talk about it is funding students based on their need. That students should have more resources if they’re more disadvantaged or they have more educational needs, like if they’re special needs or something along those lines. Then we tie in there too this idea of adequacy.

Because equity itself is a really, really difficult thing to achieve. I mean, it’s very, very difficult to have every district even spending the same, which people would call equality, much less equity, which people would suggest is, again, the most disadvantaged students receiving more money than the higher advantaged students. That’s the idea. This idea of equity is that we should be giving kids the resources that they need to get the education that they deserve.

Efficiency is the idea, of course, that we always want schools to improve, but we want schools to spend their money wisely. Then opportunity, this is the one where we are really saying this is a linchpin of this. That we think that school funding should be designed in a way that maximizes or best gives kids opportunity to receive the best education.
Again, like Marty said, we think a system of universal school choice, an Education Savings Account program, is the best way to achieve these three values of increasing equity, of increasing efficiency and, of course, increasing or expanding opportunity for students.

Drew Catt: Yeah. Those are all things that I think most people would value, especially in an education system. Speaking of equity and, I guess, to your point, James, adequacy, are states’ funding systems even equitable right now?

James Shuls: I would say, again, the funny thing about equity is that people measure it in lots of different ways. I think most people would say no, that most systems are not completely equitable. Again, it depends on the definition you use. If you say that an equitable system is one in which the most disadvantaged students— students from low-income families, students with special needs, students that are English language learners—should be receiving more funding, well, most state funding formulas do give additional state funds for those students, but many people will quibble about if it’s the right amount or if it’s enough funding.

Or when you look across states, and you look at high poverty districts versus wealthier school districts, you tend to see that there’s still some disparities. I mean, when it comes to state funding, the states … Let me back up for a second. This kind of goes to a, maybe Marty needs to explain a bit more about how schools are funded, but we rely on local property taxes, we rely on state funding and we rely on federal funding.

The biggest inequity comes in with the local property taxes, and state funding is almost always progressive to try to make up for the inequities in local funding, but the dispute will come in as to whether or not the state is doing enough. Again, that’s a value, that’s a judgment call that people have to make.

Marty Lueken: I’d also like to add that there’s been a lot of work that tries to get to the question of whether funding is equitable. For example, Matt Chingos and Kristin Blagg from the Urban Institute, they’ve done some really good work on funding and determining whether dollars are reaching their targeted uses.

They have this one report where they show that today, if you consider just the state and local funds, that in about half of the states, low-income students are enrolled in districts that receive less state and local funding than districts where not a lot of low-income students are enrolled. When you add in federal funding, which is mostly targeted to disadvantaged students, things then even out when you compare levels of funding across districts.

I think if you go back to the ’70s and before, we had obvious, huge disparities in educational funding across districts. So, things have improved. Then you have the question of, “Well, is equal across the board good?” As James has pointed out, if you think that it’s more equitable for high needs students to receive more funding and more resources for their education, then we still have a ways to go, I think.

James Shuls: Yeah, and to that, what Marty just said, we have clearly improved in terms of this area. I mean, in the past, there were significant inequities that existed because we relied almost entirely or a majority of funding came from local wealth, and so we had big disparities. In most states, like I said, and as Marty said, we’ve seen tremendous increases in the state support for high poverty school districts or students with special needs or all these sorts of things.

We’ve made tremendous progress, but this is an area where we’re always going to have debate. We’re always going to have debate because some people are always going to want more and you’re arguing over finite resources. We’ve made progress, and depending on who you talk to, you will probably not hear two people that agree on whether or not we’ve achieved the goal yet.

Drew Catt: Right. Then we could always get into the debate of what actually happens with more funding? There’s that seminal piece by James Coleman more than 50 years ago kind of showing that an increase in funding doesn’t necessarily connect to an increase in outcomes, but that’s not why we’re here.

We’re here to talk specifically about school funding. I don’t know if either one of you kind of want to backpedal a little bit and talk about how states actually fund their schools now. I know we started to get into the three buckets a little bit. Then also, what should states do to foster a system of universal choice, especially through a funding mechanism?

Marty Lueken: Sure, so in very general terms, most states first set a target level of funding for each district, and that could be based on a variety of factors such as the mix of students that they enroll. Then they determine how much revenue can be raised through local property taxes, and how that’s determined varies across districts. There may be limitations on that and so forth. Once that’s determined, then the state funds will fill in the gap. Before, I noted the Urban Institute, they have been doing work on funding formulas and actually have a pretty neat interactive tool that illustrates the different funding mechanisms.

Now, in all states’ public K-12 systems, the unit of funding is the school district, and so districts usually decide how the funds are then dispersed to their schools. In an age of digital learning and customization, ultimately, we think that maybe states should be thinking in terms of funding students directly instead of the current structure. The system where, so-called, all the dollars follow the student, and so that their families can then have more influence on what education that their children receive.

Drew Catt: Yeah, that’s fascinating. Marty, I believe you looked at funding formulas for three different states in this report. Can you tell us about them and what implications they might have for funding universal choice?

Marty Lueken: Sure. We looked at Indiana, Mississippi and Texas. Indiana was actually able to reform its school funding system in a way that centralized it a little more, which I’ll explain in a bit. Mississippi worked on funding reform for a couple of years, recently, before it failed to pass the Senate early in 2018. Texas funds its schools similarly to many states. In that state, legislation was recently introduced to enact a nearly universal ESA program that would have allowed students to use public funds for accessing private tuition and other educational services.

First let me, briefly about Indiana. In 2008, Indiana eliminated the local property tax as a source of revenue for its general fund, and it replaced that revenue by increasing the state sales tax. This didn’t completely eliminate local property taxes. The effect was pretty moderate, but with this, some property tax revenue was shifted from local to the state.

There are still local revenues that feed into other funds for things like debt service, capital projects and special education. Local funding is still a pretty significant source of revenue and remains a substantial source of revenue for school districts, but this shifted, centralized the system a bit more.

This has implications for choice because a barrier to school choice is that local taxes are typically tied to local school districts. Now, taxpayers, they expect local taxes to be used locally, so tax laws typically restrict those funds to the confines of their geographic areas that are subject to the levy. This creates a barrier to money following the student and to having a potentially really broad, robust system of choice. Shifts in funding from local to state is favorable for choice, because it frees up more dollars that are able to follow the child.

One thing to note with this funding reform is that by centralizing it a little more and shifting more funds to the state, which are mostly tax revenue, sales tax and income taxes tend to feed into that. Then you have the issue where state revenue depends on these taxes that are cyclical, meaning they can vary with changing economic conditions. It’s great when the economy is doing well, but there could be challenges, and we’ll see, when there’s a recession or something. That’s Indiana.

Then Mississippi, as I mentioned, they spent two years working on their funding reform, which unfortunately, didn’t pass. Their current system is known as the MAEP, the Mississippi Adequate Education Program. This system, districts are funded by a combination of student enrollment and resource needs. One problematic feature with their system is that funding is partly a function of, for example, the number of teacher units and other things that aren’t student-based, and so they’re based on districts’ average salary.

This means that, at least in part, teachers and not the students are funded. Because average salaries vary by district, you have a situation where a given student will generate more funding in districts with higher average teacher salaries and vice-versa, so there are other issues with the formula as well. Notably, Indiana and Mississippi, they do have private school choice programs currently. Indiana has a Voucher program and a Tax Credit Scholarship Program. Then, Mississippi has an ESA program for special needs students.

The interesting thing when you look at how school choice programs are funded, is that these programs are designed to target disadvantaged students, but in trying to create programs and expand opportunities for disadvantaged students, what has happened is that policy makers have created systems where they’re funded at significantly lower levels than the district schools or current system, where students would otherwise enroll, and so you have these huge funding disparities, too. How choice programs today are made, they’re very limited on how much opportunity that they can provide for families.

Bottom line, it’s very difficult to change a funding formula. It’s not a necessary condition to have choice, but it’s politically difficult, as evidenced by Mississippi’s experience, but not impossible, as evidenced by Indiana. I think that if states are going to go down the road of funding reform, they should really consider ways that can effectuate meaningful expansion of opportunity for their students.

Drew Catt: Yeah, so it sounds like it’s not impossible but, in some cases, a little improbable. Either way, from what I am hearing, is that it is extremely difficult to reform funding systems. If states do go down that road, what is it that they should do? Is there really a way to simultaneously achieve all three of the values that y’all have pointed out? The equity, efficiency and educational opportunity, and to even take that a step further, what about effectiveness within these systems? Is that a possibility? What really would that look like?

James Shuls: Well, I think the thing that’s clear is that if you want to improve the educational system, you really need to put educational opportunity into the mix. Here’s the problem, is that in the past, we haven’t put educational opportunity into the mix, and we focused on equity or efficiency. Those have been driving forces in education for a long time but as our friend, Milton Friedman, said before, “A society that puts equality before freedom will get neither, and a society that puts freedom before equality will get a high degree of both.”

If you just focus on equity, you just focus on leveling spending. That’s not a good goal in and of itself. I’m afraid many school finance reformers have made equity their goal, but there are bad ways to achieve equity. We could hold down the top, or we could just take away money from rich districts, give it to poor districts and not increase funding. Like there are all sorts of bad outcomes that could happen. Even if we do increase funding, if we don’t see any differences in performance—

We have plenty of really poorly performing school districts that spend a whole lot of money, and so just achieving fiscal equity is a bad goal in and of itself, and just focusing on efficiency in and of itself is a bad goal. If you’re just focusing on efficiency, chances are you’re going to be micromanaging and it’s going to stifle creativity and all these sorts of things.

When you put educational opportunity in the mix, when you think about funding students instead of funding schools, when you think about Education Savings Accounts, here’s what you do. First off, you increase opportunity, which is a great thing. Allowing people to choose the type of school they want to go to. Then, you also increase equity because you give students access to schools that they wouldn’t have had access to before. You increase that type of equity.

You also can start to put leverage on the financial equity piece because now school districts are— You have students transitioning and moving into different school districts and moving into different sectors, and so equity in terms of the finance piece helps facilitate the educational opportunity. If you have huge inequities, then schools don’t want to take students that aren’t bringing in the funding.

By putting in place school choice, by putting in place educational opportunity, you put on pressure to increase equity among finances, and by putting in place school choice, you put in place pressure to increase efficiency. Because schools are competing for students, schools are needing to improve what they’re doing to attract students. What you do by putting school choice programs into place is that you make it more possible to achieve these other goals.

That’s, I think, part of the heart of our message here is that if you just focus on equity and efficiency, not much is going to change. For anyone, any state policymaker who’s seeking to improve outcomes for students, we believe that changing your funding formula and making it more of a student-based approach and putting in place these three values together is the best way to go forward. As Marty said, places can do this on the side. Like you can create a school choice program without having to change the funding formula.

If we really want to create a very robust system, if we want to have a universal choice program where every kid has the ability to choose the school that’s really going to meet their needs, then making this type of system the system for education, I think, is the right way to go. I understand there are challenges in that, of course, but it doesn’t mean that it’s not the right approach.

Drew Catt: Yeah, so other than a student-centered, three-pronged approach with educational opportunity at the forefront, are there any considerations for policymakers to be aware of?

Marty Lueken: Sure. There can be a lot that goes into reforming funding formulas, but actually, in our paper, we wanted to highlight at least a few things that policymakers may want to pay attention to, or should in particular. One, we acknowledge that district and school budgeting officials, they can face challenges with enrollment changes. One significant perceived challenge, typically expressed among CFOs, I think, relates to fixed costs.

You commonly hear concerns that if choice programs are introduced, that’s going to harm schools because they have high fixed costs. Same as citing the argument of how much of the costs are actually fixed versus variable? There are some things that need to be covered, whatever a school’s enrollment is, like debt service, keeping the lights on, and so forth. You have the question of with reforms, should there also be some kind of safeguards to cover those costs?

Second, funding formulas should be student-based. Meaning that the funding is weighted by need, so it’s important to get those weights right. Then the third issue, which surfaced recently in Nevada, which passed a nearly universal ESA program, deals with constitutional issues. There were two lawsuits filed after Nevada’s ESA program passed, and these cases made their way to the Supreme Court.

One case, the plaintiffs alleged that the program was unconstitutional under the state’s Blaine Amendment, and uniformity clause. Second case alleged that the program would divert funds to religious schools that were appropriated to support public schools, reduce funds deemed sufficient to operate public schools, and create a non-uniform system of schools that’s not open to all students.

The Court ruled that the program is constitutional. Today, Nevada’s ESA program is on the books, but it’s not operational. That’s because the Court ruled that how the program is funded is unconstitutional. The bill lacked appropriations language for ESAs. Ideally, school choice programs would be built into the public K–12 funding formulas directly, but given that this might not always be the case or possible, policy makers do need to take care to check the constitutionality of any proposed programs’ funding directives.

James Shuls: Sorry, let me jump in real quick. We didn’t really talk about this much in the paper so this is like the podcast exclusive bonus that you get here. I mean, Marty sort of touched on it by discussing the fixed costs versus the costs that can be cut as a student leaves.

As states, if states are considering moving to broader school choice, I think they do need to start giving more consideration and thought to facilities and what is the proper state role in terms of facilities because local school districts, in most cases, can levy taxes or pass bonds to build school buildings and private schools, of course, cannot do that.
Most places, charter schools don’t receive any sort of facilities funds. That’s a consideration too, to put into the mix, is that as you think about fostering a system of school choice, you got to think about what’s the right role in terms of the state, in terms of school facilities? Again, like I said, we didn’t really talk about that much in the paper, but that’s your podcast exclusive.

Drew Catt: Yeah. I think it’d be interesting to see what states do or do not allow, in terms of co-location. You hear, anecdotally, about charter schools co-locating with district schools, but I kind of proposed this to someone earlier this year of like legally, is it possible for a private school participating in a voucher, tax-credit or ESA program to co-locate with a charter school or a district school? Their answer was, “On paper, as long as the state allows it, yeah,” so kind of interesting to see where things may go into the future.

James Shuls: Yeah, absolutely.

Drew Catt: All right. Well, as we’re nearing the end of this EdChoice Chat, do either of y’all have anything else to add?

Marty Lueken: Yeah, just a closing thought. In states that are wrestling with school finance litigation, they might be on this path to funding reform. I think school choice can be, actually be a remedy for providing equitable, however it’s defined, and adequate funding.

Usually, the remedy for addressing inequities in the public system has been to provide more resources, but there are inequities in terms of educational opportunities. As James mentioned before, that opportunity needs to be thrown into the mix. Choice can be a remedy and help improve the situation.

James Shuls: Yep. Exactly. Marty and Jason Mraz said it best, “This is the remedy.” Marty’s absolutely right. So far, when courts step in, they regularly insist on more funding or something, it’s almost always a fiscal matter.

What Marty is saying is that school choice can solve some of these problems as well. That just giving school districts money doesn’t always lead to the increases, and oftentimes, we see school districts that are, like I said before, performing very poorly, but spend a whole lot of money. More money isn’t necessarily going to solve the situation there. Adding school choice to be a remedy and to be a method in which we improve the education system, I think, is absolutely a way to go forward.

Drew Catt: Yeah. It’s really interesting, throughout the conversation, talking about localization versus centralization versus looking at education as a whole outside of the system or systems that currently exist.

James Shuls: Right.

Drew Catt: Well, that wraps up this edition of EdChoice Chats, but be sure to check out the description of this podcast for a link to Marty and James’ report, and be sure to subscribe to our podcast so you never miss another episode. Thanks for joining us today, and until next time, take care.