How Adequate and Equitable is K-12 Education Funding in the Fifth District?

Introduction

In a deep recession, one of the most significant disruptions to education is the hit to state and local government revenues, which can force cuts in education spending. This scenario played out during the previous major recession, the Great Recession of 2007-2009, when average per-pupil spending in U.S. public schools fell about 7 percent. Research has shown that cohorts exposed to these spending cuts during the Great Recession had lower test scores and attended college at lower rates — with the effects falling disproportionately on black students and poor students.

There is a lot of concern about similar effects on school funding and student achievement during the COVID-19 pandemic recession. To learn more, the Richmond Fed devoted a recent District Dialogues session to education finance during the pandemic. District Dialogues is a series of webinars hosted by the Richmond Fed that brings together educators, policymakers, and economists to discuss the challenges our communities are facing and possible solutions. This article takes a deeper dive into the data produced by one participant, professor Bruce Baker of the Rutgers Graduate School of Education. Baker, along with other researchers, has developed a unique dataset on education spending called the School Finance Indicators Database.

These data provide insight into the state of education finance prior to the pandemic: how much states were spending on education out of their potential to spend; whether that spending was adequate to meet the needs of the highest poverty school districts; and the extent to which states targeted their funds toward the highest need communities. Such information is valuable because it provides context for how well states’ education systems were positioned to weather the effects of the pandemic and how vulnerable states were to having existing disparities worsened.

How Many Resources Do States Put Toward K-12 Education?

One key measure in the School Finance Indicators Database is called “fiscal effort,” that is, the degree to which states are putting their economic capacity toward education. This indicator is state and local government spending on K-12 education as a percentage of state gross domestic product (GDP) — the value of goods and services produced in a state. The higher the percentage, the more the state’s “resources” are spent on education. Of course, there are significant differences in the size of state economies, so states with relatively large economies (particularly states that also have relatively high GDP per student) may be able to devote a smaller percentage of resources toward education and still achieve quality outcomes for their students. On the other hand, states with relatively small economies may have to increase fiscal effort to reach a desired level of educational quality.

As seen in the chart below, among Fifth District states, South Carolina and West Virginia have relatively high fiscal effort. They also rank high in the nation overall, at ninth and 12th, respectively. By contrast, North Carolina’s fiscal effort is relatively low. In fact, the state’s fiscal effort ranks 47th out of 49th in the nation. (The District of Columbia and Vermont are not calculated.) It is worth noting, however, that North Carolina also has the largest economy in the Fifth District.

Looking at fiscal effort over time, two things stand out in the chart below. One is the increase in fiscal effort around the Great Recession. Rather than plainly indicating a policy choice to increase effort, however, the researchers note the increase reflects federal assistance coupled with lags in state budget cuts. Second, most Fifth District states recently had lower fiscal effort rates than prior to the Great Recession, perhaps reflecting the long shadow of the recession on state and local government finances and subsequent policy choices.

Are Education Resources Adequate?

Another measure the researchers examine is the adequacy of spending in each state to achieve common educational outcomes for its students. Specifically, the adequacy indicator shows whether actual spending per pupil across school district poverty quintiles in each state is sufficient for those students to achieve national average test scores. In calculating the required amount of spending, the researchers take into account factors such as school districts’ labor costs, size, and student characteristics. For example, higher poverty school districts, all else equal, require relatively higher levels of spending to achieve common outcomes with lower poverty districts.

The next chart shows this adequacy comparison for the highest poverty quintile in each Fifth District state for the 2017-2018 school year. The District of Columbia is the only jurisdiction in the region where actual spending exceeds estimated required spending for students most in need. Spending gaps range from 17.6 percent in Maryland to 36.5 percent in North Carolina. However, these gaps in Fifth District states are not unique in the nation. In addition to the District of Columbia, only eight states exceed required spending in their highest poverty districts.

Note: Highest poverty districts are those in the highest poverty quintile within each state.

Are Resources Targeted to Students Most in Need?

In addition to fiscal effort and adequacy, the School Finance Indicators Database presents a measure of education resource progressivity for each state. Simply put, this measure captures the degree to which states are directing resources to higher poverty school districts compared to zero poverty school districts.

When combined with the measure of adequacy, the progressivity data in the chart below provide a more intricate picture for each state. Although the District of Columbia ranks high on adequacy, its funding is considered regressive. Higher poverty districts receive 12.4 percent less adjusted revenue than zero poverty districts, ranking the District of Columbia 43rd of 51 in progressivity in the nation. (Adjusted means that state and local revenue is adjusted for child poverty, labor market costs, population density, and district size.)  Data for North Carolina and South Carolina tell the opposite story. These states are moderately progressive, directing more resources to students in need than to more affluent students. But as noted above, these states fall short of estimated adequate spending levels. (While not shown in the previous chart, spending in North Carolina and South Carolina actually tends to fall short across district poverty quintiles, not just for the highest poverty districts.) Data for Virginia and West Virginia tell yet another story. These states are moderately regressive in their funding, providing less state and local revenue to higher poverty districts than zero poverty districts — 9 percent and 6.1 percent less, respectively. Moreover, as shown in the previous chart, their actual per-pupil spending is estimated to be insufficient to meet the needs of their highest poverty districts.

Note: High poverty districts in the progressivity measure are defined as districts with 30 percent child poverty rates. This poverty group definition differs from the adequacy chart that shows estimated spending gaps for districts in the highest poverty quintile.

Conclusion

School finance is incredibly complex and varied across states. And three indicators cannot tell a complete story of education funding and support available for students. But these measures do provide education stakeholders with a baseline picture of the adequacy and equity of school finance within their states, which provides a sense of how well their states may be positioned to mitigate disparities from the COVID-19 pandemic. How much room do relatively small states like West Virginia and South Carolina have to increase funding when they were already exerting relatively high fiscal effort prior to the pandemic? Are states with already large gaps between their actual and estimated adequate spending in high poverty districts at risk of seeing these students fall further behind? Is this especially concerning for those states that also have regressive funding systems?

States are no doubt facing a difficult environment and have tough choices ahead about how they spend limited resources. The recently passed American Rescue Plan Act provides significant federal funds for states to use on K-12 education and to help high-need students in particular. The researchers behind the School Finance Indicators Database note that federal assistance will certainly help, but sustained investment after the pandemic, particularly for students most in need, may be necessary to claw back growing disparities in order to move toward quality outcomes for all students.

Interested in reading more articles like this one? Check out Our Regional Focus, where you can find additional research and analysis on education and preparation and other pressing economic issues that affect our communities.

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.