The Road Ahead for School Finance Reform: Legislative Trends 2011 and Beyond

Introduction and Background

The reform of education funding systems to achieve greater equity and adequacy is an ongoing struggle in many states. Because funding of public elementary and secondary education is constitutionally a state responsibility, the struggle plays out largely in state legislatures. At the same time, education finance reform does not take place in a vacuum. The composition of state legislatures is deeply affected by voter preferences as expressed in elections and by economic conditions in individual states, as well as those at the national and even international levels. In addition, state courts have the potential to push reluctant legislatures toward school finance reform even with the current fiscal conditions.¹ This article analyzes recent economic, fiscal, governmental, and political factors in order to assess the prospects for meaningful education finance reform at the state level.

In this analysis, school finance reform is defined as state legislation whose purpose is to increase the equity or adequacy of a state education funding system for public elementary and secondary education, hereafter referred to as “K-12 education.” Equity here refers primarily to vertical equity or, as commonly defined, the unequal treatment of unequals.² It should be noted that horizontal equity, the equal treatment of equals,³ is, at best, a limited measure given the complex funding needs of different types of students;⁴ and, at worst, a horizontal equity approach to education funding policy can provide school districts and their students with equal amounts of inadequate funds. Although adequacy has come to mean different things in different contexts, it is defined here as sufficiency; that is, sufficient state funding for students to reach mandated education outcomes.⁵ In addition, although the focus of this article is state legislation, it is important to not overlook the role of school finance litigation because it can provide the impetus for legislatures to engage in school finance reform.⁶

The Economic and Fiscal Condition of States

The economic and fiscal condition of many states is grim. According to the National Conference of State Legislatures, “Hit with the deepest recession since the Great Depression, state lawmakers in the past three years have confronted ballooning budget gaps triggered by steep revenue declines.”⁷ Although the recession, whose beginning dates to December 2007 ended in June of 2009,⁸ many states still face daunting budget shortfalls. In spite of recent, heartening news from the stock market and corporate earnings, the national unemployment rate remains high at 8.8%⁹—almost twice the pre-recession rate of 4.6% in 2006 and 2007¹⁰ (See Figure 1 for U.S. unemployment rates, 2001–2010). Levels of unemployment have a profound effect on state revenues and fiscal health because as unemployment rises, state tax revenues decline in areas such as individual income and sales. Unemployment also leads to lower consumer spending and, hence, affects business tax revenues from gross receipts, another important revenue source for many states. On average, revenues from individual income taxes constitute over one-third of state revenues, with general and selective sales taxes and gross receipts taxes representing approximately half.¹¹,¹² In fact, in early 2011, the Center for Budget and Policy Priorities calculated that state tax collections, adjusted for inflation, were 12% below pre-recession levels.¹³

Figure 1.

U.S. Unemployment Rate, 2001–2010. Source: U.S. Department of Labor, Bureau of Labor Statistics.

The impact of reduced tax revenues is apparent in projected state budget shortfalls for Fiscal Year (FY) 2012—totaling $111.9 billion, of which the state of California alone accounts for $25.4 billion.¹⁴ In all, 42 states projected shortfalls, as a percentage of FY2011 expenditures, ranging from 2% in Indiana to 45.2% in Nevada (Table 1). These gaps will likely result in significant cuts in state appropriations in a number of areas, including K-12 public education. However, state funding for K-12 education has already been affected in a number of states. Especially damaging are those cuts that happen mid...