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In Finance Arena, a New Activism Emerges

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Submerged by other education issues for nearly a decade, the equity concerns that fomented a revolution in state spending on public schools are resurfacing across the country in litigation and in vigorous debates over school-finance systems in nearly half the states.

The reasons for the activity vary from state to state. But underlying much of it, school-finance experts say, is the sense that the higher standards and expectations for schools generated by this decade's reform movement have intensified fiscal pressures in many districts--typically those with either little property wealth or concentrations of low-achieving pupils, or both.

In the active states, the questions of what constitutes an equitable distribution system for education funds and how to generate the revenue to support it are being raised anew.

Finance experts note, however, that the revival is taking place in a climate vastly different, both politically and financially, from that of the 1970's, when the issue of school finance was the paramount item on education's agenda.

There are new and powerful competitors--both inside and outside the education community--for state aid, they say, at a time when additional revenue is harder to come by. And the reform era has introduced an important complication--"accountability"--into debates over funding mechanisms.

"The current school-finance pressure is coming right on the heels of quality issues," says Richard F. Elmore, professor of education at Michigan State University. "The political connections between funding and accountability are much more explicit."

"People are willing to provide more money for schools, but that willingness is tempered by a desire to see change," adds John Augenblick, president of Augenblick, Van de Water & Associates, a school-finance consulting firm.

Some contend that the current charged atmosphere may lead to deeper divisions within the education community--between urban and rural districts, for instance--as well as to stronger demands for accountability and a rethinking of state tax policies.

One expert predicts that even the U.S. Supreme Court may revisit the school-finance issue, reviewing a 1973 decision in which it denied education the status of a constitutionally protected right.

But much of the new legislative and judicial activity is still in its early stages. It remains to be seen whether more state aid for schools and/or more-equalized aid formulas will result.

n recent months, governors, blue-ribbon panels, or legislative committees in 21 states have reviewed school-funding formulas with the idea of making them more fair. Two states, Colorado and Connecticut, substantially altered their funding methods last year.

School-finance lawsuits demanding equity for property-poor districts are pending in Kentucky, Minnesota, New Jersey, Tennessee, and Texas.

And in February, the Montana Supreme Court found the school-finance method to be unconstitutional, while the Wisconsin Supreme Court dismissed a challenge to that state's funding system.

In addition to the new litigation, some of the most venerable and influential of the first generation of finance suits are still working their way to a conclusion. Among the developments:

The West Virginia Supreme Court, which in a dramatic 1982 ruling overturned that state's funding method, recently set in motion a possible resolution of the case, ordering a lower court to review a property-reappraisal plan.

In New Jersey, litigation on behalf of the state's most beleaguered urban systems continues in a new phase after more than 15 years of various proceedings, including a4finding that the previous finance system was unconstitutional. The state now is attempting to apply an accountability argument, saying it is not the level of funding available to the districts that is the issue but the quality of their management.

Serrano v. Priest, the 1971 case that launched the entire finance-reform effort and in which the California Supreme Court determined that the state's school-funding method violated its constitution, may come to an official close this spring as lawyers attempt to settle unresolved questions. The case is credited with pushing California toward its current role--similar only to that of Hawaii--as the dominant provider of funds for local schools.

Such a spate of finance-reform activity has not been seen since the 1970's, when legal and social-science scholars first suggested that the local wealth of a school district should not be the determining factor in the quality of the education it provided. (See accompanying story on page 11.)

The success of that theory, first in state courts and then in legislatures, substantially diminished public schools' historic dependence on local property taxes and forced states to assume a greater funding responsibility.

But the politics of the state role in education have become more complicated since then, lawmakers and finance experts point out.

With the publication of A Nation At Risk in 1983, governors demanded and legislatures adopted a number of costly reforms, such as reductions in class size, career ladders, salary increases, and other expensive measures. A number of the items were funded outside the regular equalization formulas, a strategy that some think exacerbated the problem that state equalization was intended to solve.

"There was good progress toward equalization during the 1970's," says Arthur E. Wise, director of the rand Corporation's Center for the Study of the Teaching Profession. "But after the litigation stopped and people turned their attention to excellence issues, inequity in educational opportunities and expenditures began to grow."

Tennessee, for example, gained wide attention as a reform state when former Gov. Lamar Alexander successfully pushed, among other items, a controversial career-ladder program for teachers. But the 66 rural school districts that have initiated a lawsuit over the state's financing system argue that the reforms failed to take their fiscal constraints into account.

Tennessee counties can earmark a 2-cent sales tax for public schools, a revenue source highly beneficial to urban districts. But Tennessee is among the 10 states that levy no personal income tax and it ranks relatively low among all states in per-pupil spending.

"The upgraded requirements have put a further burden on the schools," says Lewis Donalson, the lawyer for the property-poor districts.

Some experts also attribute the growing inequities to the cyclical nature of the political process, which apportions funding for schools not only through formula aid but through categorical grants.

As lawmakers come under greater pressure from special-interest groups, says Kent McGuire, senior policy analyst for the Education Commission of the States, they turn to categorical grants to ensure financing for specified programs.

After a few years, the number of categorical grants expands to such an extent that the funding system becomes inequitable, prompting demands from property-poor school districts for more equal funding, Mr. McGuire suggests.

Florida education leaders recently proposed revamping the state-aid formula to eliminate most of the 70 categorical items added over the past decade. The Florida funding system, adopted in 1978, originally had three categorical areas.

"Every time someone had an idea for something, they would tack on a categorical program," says John Gaines, executive director of the Florida Association of School Administrators.

Special economic circumstances in other states have brought the equity issue to the fore, according to John L. Myers, the National Conference of State Legislatures' senior program director for education.

In much of the Midwest, for instance, the condition of state economies--still struggling because of the collapse of the farm and mineral markets--have prompted calls for changes in funding formulas.

State Representative Arthur Ollie, chairman of the Iowa House's education committee, says his state's declining population trend, spurred by the agricultural crisis, has prompted lawmakers to try to protect districts with declining enrollments by allowing them to count students no longer enrolled for per-pupil aid purposes.

This so-called phantom-student provision, which tends to favor rural schools, has put urban districts on the offensive. They claim that it unfairly and inequitably directs money to rural districts. The battle in the legislature continues this month.

The reconsideration of how state formulas work also reflects concerns over the "adequacy" of local revenue, not simply whether the state disburses aid on an equitable basis, suggests Michigan State's Mr. Elmore, who has studied the impact of the equity movement.

"Local districts are facing budget increases that cannot be met with local funds," he says.

That issue is underscored in Kentucky, where a state judge, in finding the funding formula unconstitutional last year, held that the state's young suffered from "educational malnutrition."

But the problem of how to feed more money into the state's poorest school systems has no easy solution. Says James Parks, spokesman for State Superintendent John Brock: "In Kentucky's case, if you redivided the existing resources, you would be taking away from the poor to give to the very poor."

Such comments point to an additional complexity in the current finance debates: tight state budgets and changing demographics.

"The competition for resources is the number one problem," says Richard Salmon, a professor of education at Virginia Polytechnic Institute and State University who recently completed a survey of all 50 state funding formulas.

During the 1970's, when states first began equalizing their formulas, explains the ncsl's Mr. Myers, fierce inflation helped pour additional dollars into state coffers. Those dollars not only helped equalize state aid but enabled legislators to "level up"--that is, to raise the per-pupil allocation.

Now, however, state revenues have either stabilized or declined. The National Governors' Associ4ation and the National Association of State Budget Officers reported last October that year-end general-fund balances were at their lowest point in 12 years and expenditures for fiscal 1989 were expected to outpace revenues.

Moreover, as the average age of the population drifts upward, demands are increasing on states to offer expensive social and health services. And the corrections systems of many states, long ignored and politically unpopular, are growing at such rates as to force legislators to take action.

The ncsl reported last summer that the rate of state-spending increases for education had slowed, although it remained the largest segment of state budgets.

"There's a lot more people asking for a lot more money," says Mr. Salmon. "And the climate makes it difficult to raise taxes. Even if the tax effort has been declining, it's difficult to convince people they are not taxed to death."

And not only is education competing with other agencies for a share of the state coffer, he and others contend, but groups within the education community are competing for the available education dollars.

"I believe in what people in the field call a zero-sum concept," Mr. Salmon explains. "There's a fixed amount of money available for education. So when you start emphasizing one program, you automatically reduce the resources to another."

"We're seeing some interesting tradeoffs," says Deborah A. Verstegen, assistant professor of education at the University of Virginia. Ms. Verstegen and Mr. McGuire of the ncsl recently surveyed all states about the level of support for programs aimed at youngsters at risk of school failure. (See accompanying story on page 9.)

Teachers, who are better organized politically than are groups promoting at-risk programs, are able to get funding for salaries at the expense of funding for at-risk youths, Ms. Verstegen suggests.

"We're seeing a redistribution from disadvantaged, at-risk kids to teachers," she says.

The increased competition has also reopened old political wounds between urban and rural school districts.

Iowa's current finance battle, for instance, is so heated that transportation lobbyists fear it may spill over into other budget areas, such as highway funding.

In Tennessee, urban districts want to intervene on the state's side in the finance suit brought by rural districts. But the judge has ruled that the urban districts' interest already is being defended by the state.

In Minnesota, wealthy suburban districts are forming their own coalition to intervene, on the state's side also, in the equity lawsuit there.

Tensions between different types of school systems have also been reflected in the New York legislature, which must apportion aid to the nation's largest school district as well as to many suburban and rural systems. The New York City public schools are often a legislative target, since they consume about 33 percent of the state aid to education. But in recent arguments before lawmakers, city officials emphasized that the district enrolls 39 percent of the state's students.

At the same time, seemingly wealthy New York districts are battling for extra benefits in order to give tax breaks to local residents. Districts such as West Islip, on Long Island, are facing "a tax revolt," says a local school official.

There, skyrocketing housing values, coupled with $50,000 salaries for teachers living in one of the nation's highest cost-of-living areas, have raised homeowners' tax bills to $7,000 to $8,000 a year, says William Bernhard, the West Islip superintendent.

California educators are no strangers to the implications of tax revolts on the financing of education. The state, site of the first successful equity lawsuit, also was the first in which voters, whose home values soared with inflation, restricted increases in property taxation.

Voters later approved another measure limiting the amount of state and local budget increases for schools and other political entities.

The limitations on local taxes and budgets forced districts to turn to the state for assistance. The result: California essentially has full state funding of public schools, according to experts.

About 95 percent of its school districts are within a $200 range in per-pupil spending levels.

"No one ever doubted that if you eliminated local control [over property taxes] you would achieve equity," says Stephen M. Barro, a finance expert there.

And last year, California voters approved a proposition supported by educators requiring that 40 percent of the state budget each year be dedicated to public schools.

The state, says Superintendent of Public Instruction Bill Honig, had been gradually "disinvesting" in education, allowing its per-pupil spending level to decline as a combination of competition and state-tax changes left districts unable to keep pace financially with their enrollment growth.

If California lies at one end of the school-finance spectrum, Texas would seem to be at the other.

There, the issue of local control has sparked an unusual alliance between four property-rich urban districts and the 200 rural districts that in 1987 won the first round of an equity lawsuit--a ruling recently overturned and now on appeal before the state supreme court.

Whatever the outcome, the property-poor districts represented by their coalition, the Equity Center, and the four urban districts have agreed to avoid two of the most divisive issues that surface in school-finance negotiations: local spending caps and school-district consolidation.

While a spending cap would redistribute money from rich to poor districts, it "would be counterproductive," says Craig Foster, executive director of the Equity Center. "Politically, it would just add to our list of enemies."

As it stands now, both the Equity Center schools and the four property-rich districts--Austin, Dallas, Fort Worth, and Houston--would benefit financially from a formula change that would gear state aid toward children needing special programs. Both kinds of districts have large numbers of economically disadvantaged minority students, many of whom have limited English skills.

Such "weighting factors" in state formulas used to be arcana that few understood. But computer technology has given all lawmakers quick access to the bottom line: the printout that shows what increase or decrease their school districts will receive.

The computer printout, education officials say, has become the most important tool, or the worst weapon, in the battles over state-aid formulas.

"The politics of school finance has been revolutionized by computers and it's been pushed in the direction of precise, individual calculation," says Mr. Elmore.

Mr. McGuire calls the problem "printoutitus," saying it can be fatal to some proposals.

Representative Naomi Cohen, House chairman of the Connecticut legislature's joint education committee, recalls that it created the biggest difficulty in passing that state's new formula last year. Everyone, she says, wanted to "see if they were getting their fair share of the pie."

Legislators are looking at the bottom line from the productivity angle as well. Pressure for accountability from the public and business interests is growing, lawmakers and educators agree, and the funding formula is seen as a new tool.

"It's not just equity anymore," says Allan Odden, professor of education at the University of Southern California. "There clearly is the accountability issue. You have to respond to both issues these days.''

"More and more people want to link the allocation of money to the performance of pupils," says Mr. Augenblick, the school-finance consultant. No one has yet succeeded at forging that link, he adds, "but the talk about it is phenomenal."

The challenge, Mr. Augenblick suggests, is to develop a totally different funding-measurement system, based not on "inputs" such as books, teachers, and class size but on "outputs" such as student performance. "I'm not so sure people have thought about the equity implications of that," he says, adding that such factors affecting state formulas are likely to be developed in the next several years.

"Then, two or three years after that, we'll come back to the equity issue," he predicts.

So far, Connecticut is the only state that has tried to directly tie state funding to student performance. Districts with students scoring low on the state mastery test are given extra money through a weighted formula; the state will also provide grants to 20 cities where students score the lowest on the tests.

Other finance analysts, such as Michael W. Kirst, professor of education at Stanford University, insist, however, that outcome-based formulas are not a realistic answer and that the focus on financial inputs is appropriate.

Some policymakers are hoping that the pressure on lawmakers and school officials now being exerted by business interests will also translate into a willingness to support funding for education, even if it means tax increases.

Such is the case in Michigan, where the chiefs of the "big three" auto manufacturers have been complaining so loudly that the legislature may take action this year despite the rancor the issue has created in the past two years.

Legislative leaders, stymied in their efforts to adopt tax and formula changes, recently asked Edgar Harden, former president of Michigan State University and co-chairman of a 1987 school-finance panel, to reconvene the committee and, working with education, business, labor, and legisative groups, to develop a compromise by April 15.

When the panel began its work two years ago, Mr. Harden recalls, education interests reacted negatively to business leaders' demands for school reform. But that attitude has changed, he says, marking a vital step forward "if we're going to get any money."

Tax policy is also an unavoidable issue in Tennessee, says Representative Eugene Davidson, chairman of the legislature's House education committee. "It's the only alternative," says Mr. Davidson, conceding that gaining support for an income tax or other new taxes would be difficult.

In Texas, the lack of a personal or corporate income tax is a matter of pride.

"You can't say Texas has exhausted its tax resources," says Mr. Foster of the Equity Center. Lawmakers "are in a [financial] bind only to the extent of what the leadership wants to deal with in terms of taxes," he says.

Voters and politicians in Oregon and Montana repeatedly have scorned proposals for a sales tax in those states. In Oregon, a blue-ribbon panel last year recommended a tax increase, but declined to specify what type.

In Montana, where property-poor schools have won an equity lawsuit, lawmakers are debating a measure to force wealthy school districts to share their local taxes with poor dis4tricts because there is not enough state money to equalize school spending.

Connecticut legislators, comforted by a budget surplus, put $750 million into their new formula last year. But this year they face an $800-million budget deficit, and the governor has proposed slowing down the phase-in of the new formula.

Legislators, Ms. Cohen says, are now faced with the prospect of raising taxes, including implementing a state income tax, a proposal the governor has said he would veto.

But trying to change a state's tax system and its school-funding mechanism at the same time compounds the political difficulties.

Says Mr. Harden of Michigan: "It's a little bit harder than trying to move a graveyard."

Last week in fact, Mr. Harden's committee disbanded, unable to reach agreement on tax and school-finance issues.

Mr. Wise of the rand Corporation, whose legal theories about states' responsibility for school finance helped launch the legal drive for equity in 1968, predicts that the recent rise in litigation over state formulas is not likely to be curbed by the flurry of activity in the legislatures.

"If one or two or three of these [pending] suits are sustained by high courts, then I expect we'll see poor districts in other states ready to take the plunge," he says. "The problems will not go away. The only thing that will change is the willingness of people to file suit."

Mr. Wise also foresees that the U.S. Supreme Court may soon be asked to decide a case similiar to the one it ruled on in 1973, San Antonio Independent School District v. Rodriguez. In that case, the High Court held that education was not a right protected by the Constitution's 14th Amendment and that inequities then existing in the Texas funding system were unfortunate byproducts of local control.

But since the Rodriguez decision, Mr. Wise argues, states have enacted many mandates as part of their reform efforts--in effect overriding local control in many instances.

"The very rationale that caused the Supreme Court to sustain the whole school-finance system in Texas is gone," he contends.

A determination that education is a constitutional right would offer students the 14th Amendment's "equal protection of the laws," he says, greatly bolstering contentions that funding disparities violate that clause.

"Ironically, the fact that states have expanded their management of local schools makes them all the more susceptible to this type of lawsuit," Mr. Wise asserts. "It raises the question: If they are exercising control to improve the quality of education, then why are they not distributing their resources accordingly?"

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