State Aid to Local Schools

Contents

Introduction
Why Does the State Give Money to Local Schools?
A Simple Version of the School Aid Formula
Allowing for Cost Differences
Does the Formula Equalize?

Introduction

In 2001, the state government of Indiana will spend about $3.4 billion on aid to local school corporations.  This is by far the largest program of state aid to local governments.  It is the second largest single source of local government revenue, after the property tax.  It accounts for more than one-quarter of the state's annual budget.

Why Does the State Give Money to Local Schools?

State aid to local schools serves a number of purposes.  Here are three that are particularly important:

• Aid is a tool the state uses to influence local educational policy.  Aid is delivered to support vocational and special education, and to reduce class sizes in grades one, two and three, for example.  Without the aid devoted to these functions, local school corporations might not provide them at levels the state sees as appropriate.
• Aid reduces reliance on property taxes, and increases reliance on sales and income taxes.  The $3.4 billion in state aid is raised through state taxes, primarily the individual income, corporate income and sales taxes.  If this revenue was raised with the property tax, the property taxes would be 70% higher than they are.  Of course, the state taxes would be about 40% lower than they are.  Aid adjusts the tax mix to the levels that state policy makers think are appropriate.
• Aid equalizes local school spending among corporations.  Some school corporations have lots of valuable property to tax, others have very little.  Left to themselves, poorer corporations would spend less, richer corporations would spend more.  The aid formula delivers more aid to poorer corporations, and less to richer corporations, in an effort to equalize the resources available to school corporations across the states.  Likewise, some school corporations face higher education costs, others find education less expensive.  The aid formula delivers more aid to corporations with higher education costs.

State aid is divided among local school corporations by formula.  This is necessary because there are so many school corporations (294) and so many state legislators (150).  It would be too hard to set each corporation's aid level independently through political negotiations among legislators.  Instead, the characteristics of school corporations are inserted into a formula, which calculates the aid received by each school corporation each year.  

A Simple Version of the School Aid Formula

The school aid formula is very complex.  The formula must be approved by a majority of each house of the General Assembly.  Creating majority coalitions for a particular formula sometimes requires adding characteristics and calculations to the formula, to attract the support of particular groups of legislators.  Further, many factors influence the costs of delivering education, so a long list of characteristics are included in the formula to measure these costs.

The State Department of Education provides a description of the school aid formula in all its complexity.  School business managers probably should know the formula inside and out.  For the citizen and taxpayer, however, a simpler version of the formula may suffice.  It turns out that the distribution of state aid can be understood with just five numbers.  These are three school corporation characteristics, enrollment, assessed value and a poverty measure, and with two formula factors, a target spending level and a target property tax rate.

This simpler version of the aid formula takes this form:

Aid per pupil equals target spending per pupil minus what the school corporation can raise on its own.

Start by considering target spending as a fixed number:  so many thousands of dollars per pupil.  It is set by state policy, based on how much education the state thinks local schools should provide, and how much that education level costs.  School aid formulas of this type are called "foundation" formulas.  

The amount a school corporation can raise on its own means what it can raise from the property tax.  There are other sources of local school revenue (motor vehicle excise taxes, some local income taxes), but the property tax is by far the biggest.  Each school corporation has assessed value to tax, and taxes it at a property tax rate.  The state sets a minimum target property tax rate, which is the smallest rate that it thinks local school corporations should use.  This tax rate, times assessed value per pupil, gives the minimum amount that the local school corporation can raise on its own. 

In the simplest version of Indiana's school formula, the target spending level is $5,279, and the minimum target tax rate is $3.01 per $100 assessed value.  That makes the simple aid formula:

Aid per pupil   =   $5,279  -  $3.01 x Assessed Value per Pupil.

In 2001, the average school corporation had $60,024 in assessed value per pupil.  At $3.01 per $100 assessed value, the formula expects the average local corporation to raise $1,807 per pupil from property taxes.   The difference between this figure and target spending is $3,472, which really is close to average state aid per pupil in 2001, $3,543.  With 990,000 pupils in the state, total state aid is $3.4 billion.  

The graph shows the relationship between aid and assessed value per pupil.  This is a scatter diagram, with a "best fit" line running through it.  Each point shows aid and assessed value for one school corporation.  For example, the Town of Speedway school corporation is represented by a point on the lower right.  It has assessed value per pupil of 141,231, and receives $1,009 per pupil in state aid.  

The points are pretty clearly downward sloping, from left to right, which means the formula does some equalizing.  School corporations with more assessed value per pupil get less aid, and school corporations with less assessed value per pupil get more.  

[Remember slope and intercept from High School?  The "intercept" is where the best fit line would cross the vertical axis, at $5,279.  The slope is the amount aid declines for every dollar increase in assessed value, 0.0301.  It's negative because the line slopes down--wealthier school corporations get less aid.]

Allowing for Cost Differences
The points aren't exactly on the line, for course, because the school aid formula is actually much more complex than a simple line can show.  Still, the average error in aid (the difference between each point and the line) is only about $316, out of average aid of $3,500.  In statistical terms, the line "explains" almost 80% of the ups and downs of aid per pupil.

Consider, though, two school corporations that are not near the line, Gary and Hobart.  These two are both in Lake County (they actually border one another), and they have nearly identical assessed value per pupil, around $25,000, among the lowest in the state.  Yet, despite these similarities, Gary receives about $6,200 in aid per pupil, and Hobart only $3,800.  Why the difference?

The differences is that Gary's education costs are higher than Hobart's.  One measure of education costs is the percentage of pupils eligible for the Federal school lunch program.  Pupils from lower income families are eligible, those from middle and upper income families are not.  Lower income pupils often lack the educational advantages that middle and upper income pupils have.  It rests with the school corporation to compensate, and this increases educational costs.  In Gary, 57% of pupils are eligible for the lunch program.  In Hobart, 14% are eligible.  

This means that target spending in high cost corporations needs to be higher than in low cost corporations.  The school aid formula uses a measure called the "at-risk index" to deliver more aid to those corporations with more at-risk pupils.  The at-risk index is based on measures of poverty, the number of single-parent families, and the number of adults in the community without a high school diploma. 

The simple formula can be adjusted for cost differences using the school lunch percentage.  The formula takes the form:

Aid per pupil equals target spending per pupil, adjusted for costs, minus what the school corporation can raise on its own.

Target spending is higher in corporations with higher costs, as measured by a higher school lunch eligibility percentage.  Adding an extra characteristic to the formula changes the target numbers a little.  Here's what the formula looks like now:

 Aid per pupil   =   [$4,844 + $21 x Lunch Pct.]  -  [$2.85 x Assessed Value per Pupil].

For each extra percent of pupils eligible for a school lunch, the school corporation adds $21 to target spending.  The average school corporation, with 22% of pupils eligible for a school lunch, would have a target spending level at $5,306 per pupil.  With a target tax rate of $2.85, the corporation would raise $1,711 on its own.  State aid to the average corporation would be the difference, $3,595, which again is close to the actual average aid of $3,543.  

Statistically speaking, this second formula has an average error of $237, and explains almost 90% of the variation in school aid.  It does better for typical school corporations, though.  It still underestimates how much Gary actually gets, and overestimates how much Hobart actually gets.  

Does the Formula Equalize?
To a degree, yes, the formula does equalize.  The downward tilt shown in the above chart means wealthier corporations get less aid, poorer corporations get more.  However, it is still the case that wealthier corporations spend more per pupil than poorer corporations.  The chart below shows this.

The tilt of these points is not nearly so evident as the state aid chart.  Still, the best fit line shows that the points have a slight upward slope.  Each added $1,000 in assessed value per pupil increases spending per pupil by about $20.  The typical difference in spending between a corporation with $40,000 assessed value per pupil, and one with $60,000, is about $400 per pupil.  If the aid formula were perfectly equalizing, there would be no tilt at all--not that every corporation would spend the same, but that property wealth wouldn't affect which corporations spent more and which spent less.