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State Aid to Education Wanes, Reversing Decade-Long Trend

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The deteriorating fiscal condition of many states appears to be reversing a decade-long trend toward equity in school finance, according to a study from the Education Commission of the States (ECS).

Since 1970, more than half the states have attempted to narrow the spending gap between wealthy and poor school districts. These reform efforts have invariably relied on infusions of new state funds, distributed according to formulas that, to varying degrees, direct more state aid to "property-poor" school districts that are unable to raise sufficient funds locally. Often, the increases in state support have been coupled with property-tax relief.

The states' contribution to school districts' budgets has grown steadily, from a national average of less than 40 percent in 1970 to an estimated 49 percent in the current fiscal year. Local taxes this year will contribute 42.9 percent; the remaining 8.1 percent will come from federal sources.

In the past year, however, local revenues for schools have grown faster than state revenues, indicating a "startling reversal," according to the ECS report, A Changing Federalism: The Condition of the States.

While states, on average, still pick up the largest share of educational costs, state aid to education grew by only 6 percent between 1980-81 and 1981-82, compared with an 11-percent annual growth rate during the five previous years. Conversely, local revenues, which had grown at an average annual rate of 5.7 percent between 1974-75 and 1980-81, have increased by 12 percent since last year.

"There's been an overall increase in local revenue, primarily property taxes," said E. Kathleen Adams, the economist who wrote the report. "Where there's a lot of fiscal stress, it's the outlet that's easiest right now. Richer districts are more willing and able to raise it.''

'Minnesota Miracle'

One notable example of the shift is Minnesota. Although the trend has not yet shown up in the statistics collected by ecs, Minnesota's school districts have become more dependent on property taxes since two large, successive cuts in state aid were enacted. Property taxes in 1982 are up 25-to-30 percent over last year's collections and, by some estimates, will rise by another 15-to-20 percent next year.

And that has caused some unraveling of the "Minnesota Miracle," the 1971 law that became a national model for equalizing per-pupil expenditures and reducing property taxes.

"We've talked about the 'Minnesota Miracle' as being an education innovation, but it is really a tax innovation," said Bill Marx, administrator of the school-aids committee for the state House of Representatives. "It's in a sense turning around because there's more and more reliance on property taxes, and it'll take a couple of years to turn back around."

The major reason for the nationwide reversal, Ms. Adams said, is the economic recession, which has caused collections from income taxes and sales taxes to fall far below expected levels. Because more than 60 percent of state revenues come from these two sources, the shortfalls and instability have had a major impact on state budgets.

"In just about every state we've talked to, revenue projections have been way off," added Karen M. Benker, a research analyst for the National Conference of State Legislatures. "Only two states said their revenue projections were on target."

In Oregon and Ohio, for example, projected deficits have grown by $300 million and $500 million, respectively, since the beginning of 1982.

Even in many energy-rich states, Ms. Adams noted, the slump in energy prices has caused revenues to fall below expected levels.

The shift back to local support, although mild in most states, "will exacerbate inequities" among property-rich and property-poor school districts, Ms. Adams said. Already, school-finance suits have been filed or reopened in at least three states--New Jersey, California, and Michigan--charging, in part, that current levels of state aid are insufficient to remedy imbalances.

And since several other school-finance cases are pending in state courts, states may need to find new ways to deal with courts' demands for equity, Ms. Adams suggested.

'Postponing Changes'

"Even when there weren't the economic conditions we have now, states had a wonderful way of postponing changes," she noted. "To satisfy court dictates, one doesn't necessarily have to increase funding; it's a redistribution of funds. We will still see that postponing, though."

The trend toward a larger local burden may last only as long as the recession, predicted Ms. Adams and other observers. "I think in the long haul, we'll probably see a move in that direction again--centralization of many services at the state level, not just education," Ms. Adams said.

Tax increases, enacted in more than half the states this year, are not likely to be of much help in maintaining state aid to education, school-finance experts said.

The most common approach to the budget deficits facing some 30 states, Ms. Benker said, has been a combination of spending cuts and modest, temporary tax increases. Only corrections departments have consistently received significant budget increases, she noted, largely because of court orders to improve prison conditions.

"Quite a few states have taken an across-the-board approach, and several have made exceptions. There have been some exceptions for education," she said.

Fuel taxes, those most often increased, usually are earmarked for highway maintenance and construction, Ms. Adams pointed out.

Furthermore, in those states that have enacted increases in the so-called "broad-based" taxes--on sales and income--the proceeds will be used to lower local property taxes or "just to keep even" with inflation, federal cuts, and changes in federal tax laws that reduce state revenues, said Ms. Benker. "They are not by any means starting new programs. They're just trying to maintain what they've got."

"It's probably prudent," she added, "to take a temporary approach and wait and see what happens. Several states seem to be assuming there's going to be an upturn in the economy soon.

"If there isn't an upturn that would affect their 1983 budgets, they're going to have to take another look."

Raising Local Taxes

Perhaps recognizing that school districts will have to foot a larger share of the bill, some legislatures have made it easier for school boards to raise local taxes. In Minnesota, for example, the legislature passed a measure that will enable school districts to attempt more than the usual one-levy referendum during the 1983-84 school year. The bill also raised the number of voters' signatures needed on a petition to force a referendum on certain types of levies.

The Missouri legislature also offered districts the possibility of some relief, by raising the limit on the property-tax increase that is automatically subject to referendum. The measure must be approved by the state's voters in the fall election.

But even with the rules relaxed to the benefit of school boards seeking more money, officials in many districts are finding that voters are loath to approve increases in local taxes. In Oregon, for example, most of the levies on last month's ballot were turned down; Portland was the notable exception. In Minnesota, Mr. Marx said, "It's tougher getting them passed than it was a year or two ago, and some big ones have failed, like Duluth." Similarly mixed results have been reported elsewhere.

Growth-Averting Mechanisms

Ms. Adams said that the property-tax-limitation movement of the 1970's "won't be a factor" in school districts' efforts to raise local funds. Excessive growth in property taxes was a phenomenon restricted to a few areas, she said, and most states now have mechanisms to avert the kind of growth that led to the tax revolt.

Mr. Marx, however, was less certain. "I think we're getting to the point again where a lot of people are getting upset about their property taxes," he said. "We may be hitting another cycle like in '71."

As for the claim made by some economists that property taxes are more solid sources of revenue than sales or income taxes, Mr. Marx said: ''I don't know if they look more attractive for stability purposes. They're about the only alternative left."

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