Association for Public Policy Analysis & Management

We examine how local school districts differentially respond to statewide school finance reform. We contribute to a line of research concerning state equalization aid by assessing the effect of statewide finance reform on local school district tax effort, spending, and achievement in Pennsylvania. In the 2008-09 school year, Pennsylvania instituted statewide finance reform aimed at increasing education spending and improving the relative standing of districts spending below state-determined adequacy levels (“Act 61”). Under Act 61, additional state aid was provided to school districts whose spending fell below state-determined “adequacy” targets. State aid was based on the market value of taxable property and personal income, and on local school district tax effort. As a result, the reform created three categories of local school districts: (1) districts spending at or above the state-determined adequacy target (“no-shortfall” districts); (2) low property tax districts spending below the adequacy target (“low-tax shortfall”); and (3) high property tax districts spending below the adequacy target (“high-tax shortfall”). The state’s reform effort provides an opportunity to examine whether districts maintain their pre-reform tax effort in support of education as well as the consequences of heterogeneous changes in tax effort on district spending and achievement.

We employ a comparative interrupted time series (CITS) design to explore the extent to which low- and high-tax shortfall districts responded differently to the introduction of state reform, using districts without a shortfall as our comparison group. We find that increases in state aid led high-tax shortfall school districts to reduce their property tax rate, compared with no-shortfall districts. The decrease in tax effort among high-tax shortfall districts reveals that additional state support served as a substitution for rather than as a supplement to local funding. We also find that the provision of equalization aid to districts with adequacy shortfalls had no discernible effect on education spending, while also not reducing cross-district achievement disparities (and, at worst, exacerbating achievement differences between high-tax shortfall districts and no-shortfall districts by the third year of the reform). Taken together, these results indicate that the state’s finance reform effort did not reduce cross-district spending or achievement disparities.

Our findings support prior empirical evidence that, when districts’ ability to reduce their property tax rate are unconstrained by state policy, increases in state aid will be coupled with property tax relief for district residents. In doing so, equalization aid will substitute for, rather than supplement, local support of education spending. These findings have important policy implications for the current education finance climate in Pennsylvania. Our results point to the important role that district response can play in moderating the influence of additional grant aid.  Indeed, if future finance reform efforts in Pennsylvania (and beyond) are dedicated to increasing district spending as well as reducing the spending gap between property rich school districts and their less advantaged counterparts, consideration must be given to both the magnitude of equalization aid provided to districts as well as maintenance of effort requirements that limit the transfer of state aid to property tax relief.