For Better or For Worse? School Finance Reform in California ••• Jon Sonstelie Eric Brunner Kenneth Ardon 2000 PUBLIC POLICY INSTITUTE OF CALIFORNIA Foreword In the late 1960s, Arthur Wise’s Rich Schools, Poor Schools: The Promise of Equal Educational Opportunity prepared the legal ground for three decades of school finance reform. In that book, Wise argued that disparities in school expenditures arising from differences in wealth or geography violated the equal protection clause of the U.S. Constitution. Following the publication of that pathbreaking book, numerous court cases were filed, litigated, and challenged, and state and federal officials made frenzied efforts to “mandate” educational achievement. Ten years later, Wise wrote another book called Legislated Learning: The Bureaucratization of the American Classroom, in which he meticulously documented the “excessive rationalization” of educational decisionmaking. He predicted that the centralization and red tape created by these well-intended reforms would lead to a general decline in the quality of education. In For Better or For Worse? School Finance Reform in California, Jon Sonstelie, Eric Brunner, and Kenneth Ardon take a careful look at the iii consequences of “legislated learning” in the nation’s largest state. Not long after Wise formulated his equal protection arguments, Serrano vs. Priest, a class-action lawsuit filed in Los Angeles, challenged the constitutionality of California’s school finance system. In 1971, the California Supreme Court agreed with the Serrano plaintiffs that children of “equal age, aptitude, motivation, and ability” did not have equal educational resources. The court ordered the state to bring the school finance system into compliance with the equal protection clause of the Fourteenth Amendment. Thirty years later, Sonstelie and his colleagues ask the question: Has school finance reform been good for Californians? In the course of answering this question, the authors make several important points. First, they maintain that the reformers misunderstood the inequities under local school finance. Although many low-income and minority families lived in low-spending school districts, just as many lived in high-spending ones. As a result, reductions in revenue inequalities across districts did not help disadvantaged students as a whole. Second, the authors show that Proposition 13 affected school finance reform in ways that could not have been foreseen in 1971. By limiting property taxes, Proposition 13 eventually led to per pupil spending reductions. In the face of these reductions, school districts chose to hire fewer teachers, which resulted in a dramatic increase in the pupil-teacher ratio. Subsequent initiatives designed to restrict government spending also confounded or thwarted efforts to allot more resources to disadvantaged students. By the 1980s, the state was allocating revenues more equitably than before, but it did so more by “leveling down” high-spending districts than by raising low-spending ones. iv One of the report’s most compelling findings is also related to Proposition 13. Before 1978, the property taxes paid by commercial and industrial landowners subsidized school services for local residents. Proposition 13 effectively ended that subsidy by directing all property tax revenue to the state, which then reallocated school revenues according to a complex formula. As a result, school districts now benefit less from the largesse of commercial interests in local communities. The authors suggest that one policy option is to restore local finance in a way that is consistent with the Serrano ruling. This option, they maintain, would recapture some of the benefits of local control. One of the benefits of local control may be higher student achievement. California’s students were at or above national norms on standardized tests in the 1970s and 1980s but have fallen behind the rest of the country since that time. This poorer performance is not solely attributable to the recent influx of students with limited English proficiency. Even after controlling for such demographic changes in the student population, the authors find that California’s students have lagged behind the rest of the nation on standardized tests. They conclude that the drop in test scores cannot necessarily be blamed on state finance but that the timing of the drop is suggestive. This report is a companion piece to another PPIC report called Equal Resources, Equal Outcomes? The Distribution of School Resources and Student Achievement in California, by Julian R. Betts, Kim S. Rueben, and Anne Danenberg. By analyzing the distribution of teachers within districts, the authors found that the equalization of resources has not progressed as far as revenue allocations suggest. Taken together, these two reports highlight the complexity of an educational system that has been “legislated” and regulated for nearly 50 years. They also indicate v PPIC’s commitment to meeting the challenge of improved K–12 education policy in California. It is our hope that in describing these complexities and their consequences, we will emphasize the most important goal of all—educating California’s children for the 21st century. David W. Lyon President and CEO Public Policy Institute of California vi Summary Thirty years ago, California embarked on a fundamental reform of its system for financing public schools. The impetus was Serrano v. Priest, a suit brought in 1968 by the Western Center on Law and Poverty. At the time, California school districts were raising more than half of their revenue by taxing local property. Districts set their own tax rates, subject to the approval of their voters. Because the property tax base differed dramatically across school districts, the Serrano plaintiffs maintained that the system was inequitable and thus in violation of the equal protection clause of the Fourteenth Amendment. The California Supreme Court agreed, touching off a series of legislative and popular initiatives. In 1978, Proposition 13 removed control of the property tax from school districts and assigned it to the state. In a very short time, California went from a system in which each district determined its own revenue to one in which the state decided every district’s revenue. This transformation is now complete, and it is time to take stock. Has state vii control of school finance been good for California? This report answers that question by reviewing its main consequences. State Financing Has Not Directed More Revenue to Poor Families Financing a service at the state rather than the local level allows the government to redistribute resources to achieve policy goals. In the case of California’s public schools, this ability was limited by the nature of the inequities under local finance. Local finance did not discriminate against poor families as such. Many poor families lived in districts with low revenue per pupil, but just as many lived in districts with high revenue per pupil. Although Serrano and subsequent decisions set the parameters for public school finance, the state had considerable leeway in distributing revenues across districts. In particular, the state was free to determine where and how much revenue would be allocated in the form of categorical aid to districts. The state has used this freedom conservatively. It reduced revenue inequalities among districts, but it did not direct significantly more revenue to districts with high concentrations of disadvantaged children. In this respect, state finance has not improved on local finance. State Finance Led to a Decline in Average Spending per Pupil Concerns about the fair distribution of revenue prompted school finance reform, but a more recent concern is the sheer amount of resources provided to California’s schools. Between 1970 and 1997, spending per pupil in California fell more than 15 percent relative to spending in other states. In attempting to explain this decline, some viii observers have pointed to the growing disjunction between the racial and ethnic makeup of California’s voters and its students. This report suggests another cause, one that is linked to the shift from local to state finance. The local system relied on the property tax, about half of which was levied on commercial, industrial, and agricultural property. In effect, taxes on this nonresidential property subsidized homeowners and renters. State finance ended that subsidy, thereby increasing the marginal cost of school spending to residents. We estimate that ending this subsidy should have lowered the demand for educational spending by 10 to 15 percent, which is the decline actually observed. This decline in spending per pupil forced school districts to economize. Districts chose to hire fewer teachers, leading to a large increase in the pupil-teacher ratio. In 1970, California’s pupil-teacher ratio was 8 percent above the average for other states; by 1997, it was 38 percent above that average. This increase was not accompanied by a fall in average teachers’ salaries, another way in which districts might have economized. After investigating the question of teachers’ salaries, we conclude that districts probably could not have reduced salaries without jeopardizing their ability to attract and retain competent teaching staffs. California’s high pupil-teacher ratio is often linked to the poor performance of California students on the National Assessment of Educational Progress. Another cause of that poor performance may be the relatively large percentage